How To Buy A Car If You Have Student Loan Debt

How Do Student Loans Affect Getting a Car Loan?

Student loans can affect your ability to get a car loan if your loans are not in good standing, or if your student loans are driving up your debt-to-income ratio. Otherwise, having student loans that are well taken care of might show a lender that you're responsible when it comes to borrowing money.

Do Student Loans Affect Your Credit Score?

Yes, student loans are reported to the credit bureaus, so any student loan debt will impact your credit score. Whether it's for good or bad depends on how you handle your student loans.

Student debt affects many Americans and can take many years to pay off. Unfortunately, it can impact your credit score negatively if there’s mismanagement. However, 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.

A 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 left over 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.

For example:

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.

Refinancing Student Loans to Purchase a Car

If your student loans are driving up your DTI, it is possible to refinance them, get a better rate or term, and lower the amount of income you have going out to pay for your student debt. Refinancing your student loans could result in lowering your current monthly payments to make way for another loan, like a car loan.

Additional benefits may include an improved DTI, and more wiggle room in your budget to save for a down payment on your auto 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 lender ready to work with a lower credit borrower or someone in a unique credit situation.

• Credit Unions – 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 from student debt. These lending institutions are member-owned and may be more lenient when it comes to credit score requirements.
• Subprime Lenders – Signed up with special finance dealerships, these lenders may be what you need. Subprime lenders often assist first-time car buyers and 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 repay a loan, as well as your ability to provide a substantial 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.

Frequently Asked Questions

Can You Buy A Car With Student Loan Debt?

Buying a car is much simpler than financing one, and if you have the cash on hand, you can buy a car outright no matter the debts you hold. Using a loan to purchase a vehicle while you have student debt is possible, but your current student loans may impact your ability to get said loan, depending on how well you take care of your payments.

Is It Possible to Use Student Loans to Purchase a Car?

No. You can't use your student loans to purchase a vehicle. These loans are for educational purposes only and must be used as such.