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Financing a car as a student can be difficult. Your obstacles may include a lack of credit and a low paying job. It is possible to overcome both, but not necessarily easy.

Obstacle 1:  Limited Credit

Tackling the no credit hurdle is easy. There are many credit card companies that offer cards tailored to the student masses. These cards offer low credit limits and higher interest rates than those offered under other circumstances, but they can be useful when trying to build a credit score. If you obtain one of these cards, then maintain a balance that is less than 25% of the credit limit, the card will boost your score. Your best option is to simply use the card for gas or groceries once a month, then pay the balance in full before the due date. This will tackle two large portions of the FICO score-building model:  payment history and amounts owed (credit utilization ratio). These two points account for 65% of your credit score.

Obstacle 2:  Limited Income

The second obstacle, a low paying job, is a tougher nut to crack. The majority of lenders require $1400-$1800 in gross monthly income. What’s more, this income must be verifiable. That means you will need to show proof of income via pay-stubs or tax returns. Many students work in the service industry, where tip income and “under-the-table” income are common. Obviously, this can lead to problems with income verification. Short of getting a higher-paying job, the income obstacle may only be overcome with a co-signer. Unfortunately, these are hard to come by. The person who is willing to co-sign a loan for you must have a good credit score and the ability to pay the loan if you do not. Co-signing a loan can also strain a relationship. There is the option of finding a better job if your class load permits, but this is easier said the done of course.

Coming up with a Down Payment

Having a down payment is another consideration closely linked to your income. Since students are considered high-risk applicants by most lenders, a down payment will typically be required. The amount required may represent as much as 20% of the vehicle’s purchase price, which can be several thousand dollars. Obviously, coming by this amount of cash can be tough for a struggling college student. Again, external help from a parent, older sibling, or other relative is one of the few options available to the average college student.

Avoiding Buy-Here-Pay-Here Dealerships

If you have insufficient income or credit, you may be tempted to finance a car from one of those buy-here-pay-here car lots that advertise “100% Acceptance” or “We Finance Everyone.” These lots don’t arrange financing through indirect third-party lenders like your average dealership. They do “in house” or “on the lot” financing, meaning they make credit decisions on the spot. Often they don’t even perform credit checks. The problem is, they are notorious for charging exorbitant down payments and inflated interest rates, and they typically don’t report their customers’ payments to the credit bureaus. A vehicle loan – if paid off on time and in full – is one of the best ways to establish your credit. You are cheating yourself out of this opportunity if you work with a “BHPH” dealer.

Auto Finance Rates (APR) for Students

Unless you have a co-signer with stellar credit, you can expect to pay an elevated annual percentage rate (APR), potentially just as high as someone with bad credit. Unfortunately, it is more difficult to estimate what APR rate you deserve because rates are typically based on credit score. With insufficient credit, this is a less accurate indicator. For this reason, it is all the more important to “shop your loan” among multiple lenders. This will give you an idea of the fair market APR for your auto loan. Do not worry about hurting your credit through multiple applications. As long as you apply with multiple lenders/dealers within a 30-day period, FICO will count them as a single “hard” credit inquiry, minimizing any negative impact to your credit.

In closing, it is far from impossible to get financed as a student, but it may take some time and effort. The good news is, you are already doing your homework by reading this article. For more information, check out our article on financing a car with no credit.

 

About the author: Taylor

 

Taylor is the founder of AutoFoundry.com. He's a seasoned fiction and web writer who has been involved in the automotive industry for nearly a decade. He's currently restoring a 1985 BMW 325e. Email | Twitter | Google+

 

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  1. Pingback: Top Cars for Fresh College Graduates

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