Many student loan borrowers struggle with auto loans.
Some are denied. Those who can get approved often only qualify for smaller loans or loans with obscene interest rates.
The good news is that some moves are available to student loan borrowers to help secure an approval and a fair interest rate.
Car Loan Basics for Student Loan Borrowers
Student loans impact car buying in two ways.
First, your repayment history will have an impact on your credit score. Getting a loan will be harder if you’ve missed payments or fallen into default.
Second, student debt has a massive impact on debt-to-income ratios. The more student debt you have, the worse the debt-to-income ratio becomes.
The good news for borrowers is that there are ways to dramatically improve debt-to-income ratios without paying down loan balances.
Improving Your Debt-to-Income Ratio (DTI)
The trick with DTIs is that they look at an applicant’s monthly DTI, not the total DTI. In other words, the critical figures are monthly payments on debt and monthly income.
If you can get a lower monthly payment on your student loans, it will improve your DTI.
Federal loan borrowers can use the new SAVE plan to improve their credit profile. The lower the monthly student loan bill, the better the DTI.
The one exception to the rule is for borrowers who qualify for $0 per month payments. In that situation, many lenders treat it as though you are on a deferment or a forbearance and use as much as 1% of the loan balance for the monthly payment. This substitute figure can devastate an otherwise solid DTI.
Car Loan Quarks to Understand
If you are applying for a mortgage, there are a ton of 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 a little more unpredictable. 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 November, 2023, the following lenders advertise the lowest interest rates on 20-year fixed-rate loans.
| Rank | Lender | Lowest Rate | Sherpa Review |
|---|---|---|---|
| 1 |  | 6.08%* | Splash Financial Review |
| 2 |  | 6.24% | SoFi Review |
| 3 |  | 6.64% | 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.
