Any type of debt that appears on your credit reports can affect your ability to get a car loan. However, just having student debt isn’t enough to put you out of the race for a car loan. It’s how you’ve handled payments and the impact on your monthly budget that matters.
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 negatively impact your credit score if there is mismanagement. However, if you’ve made your student loan payments on time, it can signal a car lender that you are a responsible borrower with a proven ability to repay the borrowed money.
A good payment history on your student loans can also boost your credit score!
On the flip side, if you’ve missed or are behind on your student loan payments, it can lower your credit rating and make a lender wary of working with you. One of the biggest concerns of an auto lender is whether or not they think you can make your loan payments on time. And if your student loan accounts are littered with missed or late payments, a lender may see this as a red flag.
How student loans affect your budget
Another important aspect of car loan eligibility is your income and your disposable income. Lenders have income requirements and debt-to-income ratio (DTI) 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 are likely to meet a lender’s DTI requirements.
If your student loan payments are pushing your DTI ratio to the max, it could mean you don’t have enough income for a car loan and / or insurance. But if you have enough income to pay off a car loan, your existing student loan payments, and your other expenses, then you’re on your way to financing a vehicle.
Determine your DTI ratio for a car loan
To determine your DTI ratio, find your gross monthly income (your pre-tax income is deducted). It is listed on your computer generated pay 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 your rent / mortgage payment. Include your monthly student loan payments if you are actively paying them. Bills such as groceries and utilities are not included in your DTI ratio.
Finally, divide your gross monthly income by your monthly expenses.
Monthly expenses: $ 1,160
Gross monthly income: $ 3,000
1,160 / 3,000 = 0.39 X 100 = 39%
If more than 45% to 50% of your income is already used to pay for vehicle expenses and your existing loans, it can be difficult to qualify for a car loan.
Student auto loan options
If all you put on your credit reports are your student loans, then you can be considered a new borrower or a borrower with no credit. This usually creates a low credit score because the FICO credit scoring model favors borrowers with longer credit histories and filled with timely payments.
Student borrowers who do not have a credit history may be more likely to qualify for a car loan from a credit union. If you have been a long-time member of a credit union, they may be willing to help you with financing a vehicle despite a lower credit rating. These lending institutions are member-owned and can be more lenient with credit score requirements if you can afford a car loan.
If a credit union isn’t an option, then a subprime lender with a special finance dealership may be what you need. Subprime lenders often help first-time car buyers, bankrupt borrowers, and even borrowers with tarnished credit histories. Instead of turning you down at first sight for a low credit score, subprime lenders look at 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 lowering your credit score, we want to help you here Auto Express Credit. We have created a nationwide network of Specialized Finance dealers and will be looking for a dealer in your area who is equipped to handle unique credit situations.
Fill out our free auto loan application form and we’ll immediately get to work finding a dealership near you.