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Paying in cash is the ideal way for students to buy a car while in college. However, unless mom and dad are super-wealthy, most young adults will have to finance – which makes sense only if you commute.

Then, having a parent co-sign the auto loan or lease agreement is the next best alternative. But what if mom or dad are unwilling or unable to act as a guarantor?

How do you qualify when you have little income, no down payment, and limited credit history?

It won’t be easy. While you cannot use student loans to buy a car, they could help your case in ways you might not expect – if you can borrow above your direct education expenses.

Auto Loans for College Students

Qualifying for an auto loan will prove the most challenging for college students because you must finance the entire purchase price. Take this avenue only if you commute and will need a reliable auto after graduation.

Request a secured auto loan here. (Affiliate Link) Individuals who meet minimum standards on all three eligibility measures are more likely to walk away with approval without a co-signer.

  1. Good credit score
  2. Low debt-to-income ratio
  3. Large down payment

No Credit

Most undergraduates are young adults with little or no credit history. Auto finance companies prefer lending to people with an established record of responsible handling of financial obligations.

However, the act of accepting student loan money to fund college costs gives you an unexpected advantage.

  • The lender (federal and or private) transmits the disbursement information to the three main bureaus (Equifax, Experian, and TransUnion) creating a consumer report
  • You have no credit score (FICO or Vantage until six months after you begin repayment post-graduation), but the mere existence of a file at the bureaus confirms your identity as a real person

Lenders are more likely to approve first-time applicants when they can validate their identity. The verification of name, address, social security number, and date of birth is the most predictive element of future delinquency.

Low Income

Many college students are unemployed or have meager incomes because they are too busy studying to work long hours. Your debt-to-income ratio drives the cost of the automobile you can afford to finance with a loan.

Therefore, a low sticker price is your best friend when you do not have a higher paying job as of yet. Of course, a used car will cost far less than the latest model that sits gleaming in the dealer showroom.

Finally, commuters can argue that excess student loan proceeds (see below) should count as income on the car loan application as it would for off-campus rental housing. You do not owe any payments until six months after graduation.

No Down Payment

Saving enough money for a down payment on an auto loan is challenging when college students must pay for books, tuition, lab fees, room, and board at the same time. There are simply too many other spending priorities to stockpile enough cash.

Fortunately, some lenders will often approve applicants with no money down. The equity in the vehicle secures the contract, allowing lenders to repossess in the event of default to minimize losses.

Finally, any excess student loan money (see below) could go towards a more substantial deposit.

Leasing Cars While in College

Leasing is often the most sensible way to finance a car while in college because the monthly payments are much smaller, the vehicles more reliable, and the timing fits into a short window.

  • You pay only for the depreciation based on miles driven
  • Newer autos have fewer breakdowns and repairs
  • New vehicle warranties cover mechanical defects

Short-Term

Short-term auto leases provide dependable transportation during the period that most college students enjoy on-campus parking privileges. Every parent’s nightmare is having their child suffer mechanical breakdown hundreds of miles away from home.

Leasing a new car still under warranty minimizes these worries. Plus, making lower payments to use rather than own the vehicle is far more affordable. A short-term financial commitment makes it easier to cost-justify the reliable option over a used jalopy prone to malfunction at any time.

International

International college students often turn to car leasing as the preferred financing option. The alternative represents the best chance for approvals, and it makes more sense to rent instead of own for temporary transportation needs.

International credit reports are less robust than those compiled on U.S. citizens. Plus, FICO and Vantage scores may not exist or work as well to predict future default.

Therefore, US-based lenders prefer the smaller amounts financed during leases – you pay only to rent the car for three to four years.

Once they graduate and return to their home country, student Visa-F holders no longer need to lease the vehicle. Expatriates can drop it off at the dealership on their way to the airport with no further obligation – provided there is no damage, neglected repairs, or excess mileage.

Using Student Loans for a Car

You cannot use student loans to buy a car because you cannot borrow enough money to cover the sticker price after addressing your direct college costs. Although, commuters might have enough leeway for a deposit and monthly payments.

The Studentaid.gov website spells out acceptable college costs without making any concrete statements disqualifying the funding, maintenance, or fueling of an auto.[1]

  • If you commute to school, include transportation costs
  • If you live on campus, include travel during school breaks

You can defer student loan repayment until after graduation, meaning the proceeds remaining after direct costs (tuition, lab fees, textbooks, etc.) could go towards other qualifying expenses while taking classes. However, the two channels present polar challenges.

 FederalPrivate
Borrowing LimitLowerHigher
QualificationsEasyHarder

Federal

Funding deposits and monthly car payments using federal student loan money has practical limits. The government caps the amounts you can borrow each year but approves every applicant.

The amount the government will lend barely covers tuition – leaving little money left over for other expenses. Compare these limits to the average annual cost of attendance for public universities ($25,000 in-state), and private colleges ($50,000).[2]

YearDependentSolo
Freshman$5,500$9,500
Sophomore$6,500$10,500
Junior$7,500$12,500
Senior$7,500$12,500

On the other hand, almost every young adult completing the Free Application for Federal Student Aid (FAFSA) form qualifies to borrow money. The government approves nearly everyone, regardless of their credit score, debt-to-income ratio, or employment record.

Is it any wonder we have a debt crisis given this standard?

Private

Using private student loan proceeds to cover deposits and monthly car payments offers more wiggle room, but it could prove more challenging to qualify for this source of college funding.

Private banks allow undergraduates to borrow extra money each year, leaving a more significant surplus to address other expenses such as transportation. The non-government lenders work within two higher limits.

  1. Annual: total cost of attendance less other federal aid
  2. Aggregate: up to $120,000 for a $30,000 four year annual average

However, approvals for private student loans are more challenging to obtain because the young adult must do more than just complete a FAFSA form. Most banks require a co-signer unless you meet strict credit, employment, and debt-to-income requirements.

Studentaid.gov Footnoted Sources:

[1] Transportation Costs

[2] Yearly Borrowing Limits Federal