Any type of debt listed on your credit reports can affect your ability to get a car loan. However, student debt alone is not enough to knock you out of the car loan race. What matters is how you handle payments and the impact on your monthly budget.
Student loans and your loan
Student debt affects many Americans, young and old. Payback can take many years, and unfortunately, it can negatively affect your credit rating if poorly managed… Although, if you made your student loan payments on time, it could tell the auto lender that you are a responsible borrower with a proven ability to repay the loaned money.
Good payment history on your student loans can also improve your credit score!
On the other hand, if you miss or are late on your student loans, it can lower your credit score and make the lender wary of working with you. One of the biggest concerns for an auto lender is whether they think you can make your loan payments on time. And if your student loan bills are littered with missed / late payments, the lender may see this as a red flag.
How Student Loans Affect Your Budget
Another important aspect of eligibility for a car loan is your income and available income. Lenders have income requirements and debt-to-income ratio (DTI) requirements… Your DTI is a calculation that shows your existing debt compared to your monthly income. If your ongoing monthly expenses, including projected car payments and projected insurance premiums, keep your DTI below 45-50%, you are likely to meet the lender’s DTI requirements.
If your student loan payments are increasing your DTI to the maximum, it may mean that you do not have enough income balance for your car loan and / or insurance. But if you have enough income to pay off your car loan, your ongoing student loan payments, and your other expenses, then you are on the right track when it comes to vehicle financing.
Calculating your DTI for a car loan
To find your DTI, find your monthly gross income (income before taxes). It is listed on your computerized check stubs if you have W-2 income…
Then add up all of your monthly loan payments, including things like minimum monthly credit card payments and rent / mortgage payments. Include monthly student loan payments if you are actively paying on them. Food and utility bills are not included in your DTI.
Finally, divide your monthly gross income by your monthly expenses.
Monthly expenses: $ 1160.
Monthly Gross Income: $ 3,000.
1,160 / 3,000 = 0.39 X 100 = 39%
If 45% to 50% of your income is already used to pay for vehicles and existing loans, it can be difficult to qualify for a car loan.
Car loan options for students
If all you have listed on your credit reports is your student loans, then you may be considered a new borrower or no loan borrower… This usually creates a low credit rating as the FICO credit rating model favors borrowers with a longer credit history full of on-time payments.
Student borrowers who do not have a credit history may have a higher chance of getting a car loan from a credit union. If you are a longtime member of a credit union, they may be willing to help you with vehicle financing despite a lower credit rating. These lending institutions are member-owned and may be more lenient on credit rating requirements if you have the ability to repay your car loan.
If the credit union is not suitable, then the subprime lender has signed up with special financial representation maybe what you need. Subprime lenders often help first-time car buyers, bankruptcy borrowers, and even borrowers with tarnished credit history. Rather than rejecting you at the first glimpse of a low credit rating, subprime lenders examine many other aspects of your ability to repay a loan, such as your ability, stability, and willingness to pay (down payment).
Are you ready for a car loan?
If your student loans lower your credit score, we want to help you here at Car loan Express… We have established a nationwide network of dedicated financial dealers and we will look in your area for a dealer who can handle unique credit situations.
Complete our free car loan application formand we’ll start locating a dealer near you.