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The Student Loan Borrower’s Guide to Getting a Car Loan

Cars have never been more expensive, and student debt can complicate finding an auto loan.

Written By: Michael P. Lux, Esq.

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Many student loan borrowers struggle with getting approval for auto loans.

Some are outright denied, while others might only be approved for smaller loans or face obscene interest rates.

Fortunately, there are steps that student loan borrowers can take to increase their chances of securing an approval and a fair interest rate.

Car Loan Basics for Student Loan Borrowers

Student loans affect buying a car in a couple of ways.

Firstly, your student loan repayment history influences your credit score. If you’ve missed payments or defaulted on your student loans, securing a car loan can become more difficult.

Secondly, student debt heavily impacts your debt-to-income ratio. The more student debt you have, the less favorable your debt-to-income ratio appears to lenders.

However, there’s a silver lining for borrowers. There are strategies to significantly improve your debt-to-income ratio without having to reduce your loan balance.

Improving Your Debt-to-Income Ratio (DTI)

The key to understanding Debt-to-Income (DTI) ratios is that lenders focus on your monthly finances rather than your total debt. In other words, the critical numbers here are your monthly debt payments compared to your monthly income.

Lowering your monthly student loan payment can improve your DTI ratio. One way in which this can be achieved is by applying for a new repayment plan.

For those with federal loans, using the new SAVE plan can be a great way to enhance your credit standing.

The one exception to the rule is for borrowers who qualify for $0 per month payments. In these cases, many lenders may treat this as if you’re in deferment or forbearance, and they might calculate your monthly payment as 1% of your total loan balance for DTI purposes. This assumption can significantly worsen an otherwise healthy DTI ratio.

Car Loan Quarks to Understand

If you are applying for a mortgage, there are numerous borrower protections and uniform standards that apply. The student loan impact on mortgage applications is much easier to understand. It also clarifies how a student loan tweak could improve a mortgage application.

By comparison, car loans are slightly less predictable. In some cases, car loans offer excellent terms to the consumer because the car loan is being used to help facilitate a car sale. In other cases, the car price is an afterthought because the dealer really wants you in a profitable car loan.

Some consumer protections with auto loans exist, but buyers should still exercise great caution.

Each lender has unique standards for deciding who gets a loan and what rate they receive. Like anything else, shopping around is essential for getting a fair deal. It also means that tweaks to improve your application might make a big difference with some lenders, while it doesn’t move the needle at other lenders.

Managing the Timeline

If you sign up for SAVE or choose a new repayment plan to help your auto loan application, it is critical to remember that the changes do not happen immediately.

First, the loan servicer has to process the application and update their system. Once the repayment plan application is processed, the borrower still has to wait for the new monthly payment to get reported to the credit bureaus. This reporting typically only happens once a month.

Because the entire process can take a couple of months, it is essential to do it in advance of financing your next car purchase.

Sherpa Tip: In an ideal world, consumers would be able to give the lender the new monthly payment and have their application adjusted accordingly. Sadly, because almost all credit decisions are now done by a computer, providing additional information usually doesn’t make a difference. That said, it never hurts to try.

Private Student Loans and Auto Applications

Unlike federal loans, which have a variety of repayment plan options, private loans are more limited.

In many cases, a borrower cannot adjust their monthly bill.

The best option to improve DTI figures for private loans is to refinance the loan. In many cases, borrowers can secure a lower interest rate and lower monthly payments. In the current interest rate environment, the 20-year fixed-rate loan is the best choice for most borrowers. For those who are refinancing to improve their DTI, it is almost certainly the best option.

As of July, 2024, the following lenders advertise the lowest interest rates on 20-year fixed-rate loans.

RankLenderLowest RateSherpa Review
1Splash Financial6.08%*Splash Financial Review
2Laurel Road6.55%Laurel Road Review
3ELFI6.64%ELFI Review

Other Considerations for Student Loan Borrowers Buying a Car

  • Credit cards can have a massive impact. Unlike student loans, paying down a portion of your balance can lower your minimum monthly payment. If you are struggling to get approved for a decent loan, paying down credit card debt might be the best path forward.
  • Switching repayment plans again. Once the car loan is secured, borrowers can return to their original repayment plan with a higher monthly payment. Alternatively, they can pay extra each month to pay the loan off as planned but keep the low minimum monthly payment for added flexibility.
  • Make sure the car purchase is a good one. Auto prices are exceptionally high right now, and many people depend on a car to get to work. This is a recipe for making a regrettable mistake. Don’t let a dealer coerce you into making a purchase you cannot afford. Take your time to make a smart decision.
About the Author

Student loan expert Michael Lux is a licensed attorney and the founder of The Student Loan Sherpa. He has helped borrowers navigate life with student debt since 2013.

Insight from Michael has been featured in US News & World Report, Forbes, The Wall Street Journal, and numerous other online and print publications.

Michael is available for speaking engagements and to respond to press inquiries.

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