Any type of debt that’s listed on your credit reports can impact your ability to get a car loan. However, just having student debt isn’t enough to knock you out of the race for a car loan. It’s how you’ve handled the payments and the impacts to your monthly budget that matter.
Student Loans and Your Credit
Student debt affects many Americans, young and old. It can take many years to pay off, and unfortunately, it can impact your credit score negatively if there’s mismanagement. Although, if you’ve been making your student loan payments on time, it can tell an auto lender that you’re a responsible borrower with a proven ability to repay borrowed money.
Good payment history on your student loans can increase your credit score, too!
On the flip side, if you have missed or late payments on your student loans, it can create a lower credit score and make a lender wary of working with you. One of an auto lender’s biggest concerns is whether or not they think you can make your loan payments on time. And if your student loan accounts are littered with missed/late payments, a lender may see that as a red flag.
How Student Loans Affect Your Budget
Another large aspect of auto loan eligibility is your income and available income. Lenders have income requirements and debt to income (DTI) ratio requirements. Your DTI ratio is a calculation that shows your existing debt compared to your monthly income. If your existing monthly expenses, including your projected car payment and estimated insurance premium, keep your DTI below 45% to 50%, you’re likely to meet a lender’s DTI requirements.
If your student loan payments push your DTI ratio to the max, it could mean not having enough income leftover for a car loan and/or insurance. But if your income is enough to repay a car loan, your existing student loan payments, and your other expenses, then you’re on the right track for vehicle financing.
Figuring Out Your DTI Ratio for a Car Loan
To figure out your DTI ratio, find your gross monthly income (your income before taxes are taken out). It’s listed on your computer-generated check stubs if you have W-2 income.
Then, add up all your monthly loan payments, including things like monthly minimum credit card payments and your rent/mortgage payment. Include your monthly student loan payments if you’re actively paying on them. Bills such as groceries and utilities are not included in your DTI ratio.
Lastly, divide your gross monthly income by your monthly expenses.
Monthly expenses: $1,160
Monthly gross income: $3,000
1,160 / 3,000 = 0.39 X 100 = 39%
If more than 45% to 50% of your income is already being used to pay for the vehicle expenses and your existing loans, it can be tough to qualify for a car loan.
Auto 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 a no credit borrower. This typically creates a low credit score, since the FICO credit scoring model favors borrowers with longer credit histories full of timely payments.
Student borrowers with lacking credit histories may have a higher chance of auto loan eligibility with a credit union. If you’re a long-standing member of a credit union, they may be willing to assist you with vehicle financing despite a lower credit score. These lending institutions are member-owned and may be more lenient when it comes to credit score requirements if you have the chops to repay a car loan.
If a credit union isn’t an option, then a subprime lender signed up with a special finance dealership may be what you need. Subprime lenders often assist first-time car buyers, bankruptcy borrowers, and even borrowers with tarnished credit histories. Instead of turning you away at the first sight of a low credit score, subprime lenders examine the many other aspects of your ability to repay a loan such as your ability, stability, and willingness to pay (a down payment).
Ready for a Car Loan?
If your student loans are dragging down your credit score, then we want to help you here at Auto Credit Express. We’ve created a nationwide network of special finance dealerships, and we’ll look for a dealer in your local area that’s equipped to handle unique credit situations.
Complete our free auto loan request form, and we’ll get right to work looking for a dealer near you.