Savanna Hoffman
While it is technically possible to use student loans to buy a car, it is not a good idea. Student loan interest rates are higher than the average rate for a car loan, and student loans take much longer to pay off. This means that you could still be paying off the loan long after you get rid of the car. Additionally, cars depreciate in value, so you will be paying for something that is worth less and less over time. If you need a car as a student, it is better to save up and buy a cheap used car, or look into special student car-buying deals from vehicle manufacturers or student auto financing programs from financial institutions.
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What You'll Learn
Student loan interest rates are higher than car loan rates
Student loans should not be used to purchase a car. Student loan interest rates are higher than car loan rates, and student loans are meant to cover educational expenses. In 2018, the average five-year auto loan had an interest rate of 4.21%, while undergraduate student loan rates were 5.05%, and graduate loan rates were 6.6%. Direct Plus loans were even higher at 7.6%.
The average loan term for cars in 2018 was 68 months, or 5-6 years. In contrast, the standard repayment plan for student loans is 10 years, and many graduates opt for income-driven repayment plans that can extend the loan term to 20-25 years. This means that by purchasing a car with a student loan, you could be repaying that car for a decade or more, long after you sell or trade it in.
Student loans are intended to boost your earning potential by helping you earn a degree. Cars, on the other hand, depreciate in value and will be worthless every time you drive them. Using student loans to buy a car means you could be making payments on something worth a fraction of what you paid for it.
If you need a car as a student, it is recommended to save up money and buy a cheap used car, or to use rideshare or car-sharing services. While it can be challenging for students to qualify for a car loan, it is not impossible, especially if you have a cosigner or a steady income.
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Student loans are meant for education expenses
Student loans are intended to cover education expenses, and while some lenders may allow you to use the funds for other purposes, it is generally prohibited to use student loans to buy a car. Student loans are meant to help students cover tuition, fees, books, supplies, and living expenses. When taking out a student loan, individuals agree that the money will be used for educational purposes.
Student loans have longer repayment terms than car loans, and using student loans to buy a car can result in paying more in interest costs. Student loan repayment terms can range from 10 to 25 years, while car loans typically have shorter repayment periods of around 5 to 7 years. As a result, individuals could end up repaying the car for a decade or more, even after selling or trading it in.
Additionally, cars depreciate in value over time, while a degree can boost earning potential. Using student loans to buy a car may lead to paying for something worth much less than the purchase price. Furthermore, falling behind on car loan payments can result in the lender repossessing the vehicle.
While it may be tempting to use student loans for a car purchase, it is important to consider the financial implications and explore alternative options, such as saving up for a used car, improving credit scores to qualify for car loans, or utilizing ridesharing and car-sharing services.
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Car loans are secured with the vehicle as collateral
Student loans are intended to cover educational expenses, including tuition, books, fees, supplies, and living expenses. While there is no oversight once the money is in your bank account, it is not advisable to use student loans to buy a car. Student loan interest rates are higher than the average rate for car loans, and repayment terms can range between 10 to 20 years. This means you could still be paying off the loan long after you sell or trade in the vehicle.
Car loans, on the other hand, are secured with the vehicle as collateral. This means that the lender will keep the car title until you finish paying off your loan. If you are unable to repay, the lender can repossess your vehicle and sell it to recoup the loss. Car loans tend to offer larger loan amounts and more competitive interest rates compared to unsecured auto loans. They are the most common financing option for borrowers looking to purchase a vehicle.
There are several types of car loans that use the vehicle as collateral:
- Auto equity loans: These loans are based on the difference between what you owe on your current car loan and the value of your car. They often have lower interest rates and longer terms than car title loans, but not many banks offer them.
- Car title loans: These loans are typically smaller, with higher interest rates and shorter repayment terms than auto equity loans.
- Simple interest auto loans: These are issued by a private lender.
- Direct financing auto loans: These are offered by banks, credit unions, or financial companies.
- Indirect financing auto loans: These are arranged by a car dealership.
When deciding between a secured or unsecured auto loan, it is important to consider the advantages and disadvantages of each. Secured auto loans may offer lower interest rates and a quicker application process, but they also come with the risk of repossession if you are unable to make payments. Unsecured auto loans, on the other hand, do not require collateral, but they may have lower loan amounts and higher interest rates. They can also be used for expenses beyond the vehicle itself.
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Student loans have longer repayment terms
Student loans typically have longer repayment terms than car loans. The standard repayment plan for federal student loans is 10 years, and income-driven repayment plans can extend the loan term to 20-25 years. In contrast, the average loan term for cars in 2018 was 68 months, or just under six years. With a car loan, you can pay off your debt in a shorter period, whereas with a student loan, you may still be paying off the loan long after you get rid of the car.
The longer repayment period of student loans means that you will be paying interest for a more extended period. This can result in you paying far more in interest overall, even though student loan interest rates are typically lower than car loan rates. By the time you finish paying off a student loan used to purchase a car, you may still be paying for a vehicle you no longer own or drive.
Additionally, student loans are intended to cover education-related expenses, such as tuition, fees, books, and supplies. While some student loans may cover transportation and vehicle-related expenses, it is generally prohibited to use them specifically for purchasing a car. Using student loans for non-allowed purposes, such as buying a car, could be considered loan fraud and carry legal consequences.
Therefore, while it may be tempting to use student loans to buy a car due to the longer repayment terms, it is essential to consider the potential drawbacks, including higher overall interest costs and legal restrictions. Exploring alternative options, such as saving up for a used car or considering car-buying deals specifically for students, may be more financially prudent decisions.
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Students can get car loans with a cosigner
While it is possible for students to get car loans, it can be challenging due to their limited credit history and income. One of the best ways to get approved for a student auto loan is to have a cosigner. A cosigner is someone who agrees to take full legal responsibility for your loan if you can't pay it back. This could be a parent, relative, or another adult with established good credit who agrees to apply for the loan with you.
Having a cosigner can increase your chances of being approved for a loan. However, if you can't repay the loan, your cosigner will be responsible for the balance, and delinquent loan payments could negatively affect both your credit scores.
To improve your chances of qualifying for a car loan as a student, you can check if your school partners with any financial institutions that offer car loans for students. Some banks and credit unions offer programs to help students finance vehicles, and some car manufacturers have special car-buying deals for students.
It's important to note that taking on a car loan can be a financial burden, especially for students with limited resources. Before applying for a car loan, it's recommended to figure out a realistic budget and consider the monthly cost and the length of the loan. Additionally, building up your credit score and saving for a down payment can help improve your chances of approval and lower your interest rates.
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Frequently asked questions
No, you cannot use federal student loans to buy a car. Using student loans to buy a car is considered loan fraud and can have legal consequences.
Student loans are meant to cover education-related expenses, such as tuition, fees, books, supplies, and living expenses. Student loan repayment terms are also much longer than car loans, resulting in higher overall interest costs.
Yes, you can consider leasing a car or using ride-sharing and car-sharing services. Some financial institutions and car manufacturers also offer special student auto financing programs or discounts.
To get approved for a car loan, students should focus on building their credit score, demonstrating stable income, and making a larger down payment. Having a cosigner can also improve the chances of approval.
Buying a car with a student loan can lead to higher overall interest costs and longer repayment periods. You may still be paying off the loan long after you sell or stop using the car. It can also impact your financial security and ability to qualify for other loans.
