“Strive for progress, not perfection,” a popular student motivational quote argues. When it comes to car loans, even that is hard to attain for many.
As most experts will agree, student loans are widely considered among the most difficult financing options. If you’re affected, that is certainly unpleasant. But there is a twisted logic behind all of this. Understanding it can contribute significantly towards improving your chances of getting a loan after all.
This article has two parts. First, we’ll deal with the reasons why student loans are so hard to come by. Then, we’ll show you how to build a better case for your car finance deal.
As you’ll soon find out, things may not be ideal when it comes to student car loans. But they’re anything but hopeless.
Why student car loans are notoriously difficult
On paper, student life sounds like a lot of fun: You get to learn more about the things you love. You get to party all night and get up pretty much whenever you feel like it. You get all the fun without any responsibility.
In reality, things are a lot less carefree than that. Most students spend hours each day in the library. They need to find a job on the side to pay for tuition, rent and food. And most colleges these days run on strict schedules which hardly allow for the kind of excessive lifestyle you may have dreamt about.
As if that weren’t enough, students are typically not taken for full with most banks. Getting a loan as a student is doubly hard and sometimes outright impossible.
Contrary to popular opinion, however, banks do not hold a grudge against students. They are simply acting rational.
Life as a student is contradictory in a way. You’re working hard every single day, often more than forty hours per week. On top of that, there are constant tests and examinations, which put you under significant stress. And yet, you’re not earning any money with all of our work.
To the contrary, you’re paying expensive fees to be able to study in the first place!
So, in effect, your college years are a time of investment. For a bank, this poses a problem. Already for someone who’s employed, there’s always a fair risk they’ll default on their loan. For a student, this risk is considerably higher still.
Many students don’t have a job. And even if they do, they can just barely afford their accommodation. They usually haven’t had the time to amass any big savings yet. So, from a bank’s perspective, there is simply too much to loose and not enough to gain.
No track record
Things get worse.
Theoretically, even a low income need not be an issue when it comes to loans. If you’re applying for a loan, most banks will also check your credit rating. This gives them an impression how reliably you’ve met your financial obligations in the past. If your score is reasonable, you may get credit even with fairly low savings.
We’ve written a lot about credit ratings in our blog. Your rating is mostly based on missed payments in the past and outstanding debt. It is an anything but an ideal tool. By combining it with other tools, however, it can be useful in giving the lender a quick impression of your financial trustworthiness.
It is easy to see why a bad credit rating might be an obstacle for getting a loan.
What’s even worse, though, is not having a credit rating at all. Without a credit score, banks can not assess your creditworthiness. They will have to base their entire decision on your current income and assets. That’s not a lot to go by.
To get a rating, you will need to have taken out a loan in the past. At the very least, you need to have bought things and paid for them using credit. This is usually not the case with students. Which is why students often don’t have a credit rating – and why it’s so hard for them to get finance.
It no longer holds true that you can not get a car with a bad credit rating. If your cars helps you get a job, it in effect pays for itself.
This reasoning doesn’t work with students. If you think about it, students don’t really need a car the way someone else might need a car. They can use public transport to get to the university. And if they do have a job and require a car to take them to it, then it’s hardly ever for a full-time employment. These positions usually don’t generate any significant income.
All of this adds up to a clear picture: Students pose a significant risk for banks.
It is true that banks could be more compassionate and cooperative. But it isn’t hard to see why they’re not really warming up to student car loans.
How to improve your chances
Let’s now turn to the most important point of this article: How to improve your chances of getting a student car loan.
We’ll start off with a list of important questions. These will provide you with a better perspective on how to approach the topic:
- Do you really need a car? This may not be a question you’d like to hear. But ask yourself: Can you really not get by without an automobile? Sure, a car provides a sense of freedom. It’s very convenient, too. But shouldn’t your priorities be somewhere else? We’re certainly not advising against buying a car. But make sure you want it enough to justify the costs involved.
- Do you really need an expensive car? It’s hard to say how many applications for student car loans fail just because the sum was too high. Recently, on a forum, a student asked why he could not get a £9000 car loan. To outsiders, the reason was easy enough: He was looking for the wrong model! As a student, your chances are bad enough. Don’t waste them by being unrealistic. Make a list of things your car needs to be able to do. Then, select the cheapest car you can find that meets these criteria.
- Are there alternatives to buying? Over the past years, the market for car financing has significantly expanded and diversified. Leasing and various alternative financing options have become mainstream. We don’t really recommend them per se. Buying is still your cheapest option, if done right. But you should at least familiarise yourself with these options and consider them.
If, after answering these questions, you arrive at the conclusion that you still want to buy a car, let’s now investigate how you can improve your chances of making a successful application.
Get proof of your reserves
Although banks often suspect otherwise, students are not poor by default. Quite a few of them have had jobs all the way through school. Some even put in an extra year of work right before leaving for university.
If you have put aside some money, then make this a key point of your loan application. Savings vastly reduce the risk of you defaulting. Banks accordingly value them highly.
Make sure, therefore, to prove that you have a backup plan should things go wrong.
The phone’s your friend
As we mentioned, banks are loathe to provide credit to students because it’s hard to gauge their financial reliability.
It is not impossible, however. One thing almost every single student has is a mobile phone. And your history of paying for your mobile phone bills is a small, but not entirely insubstantial indication of how well you’re meeting your obligations.
If you’re looking for a student car loan, try and recover as many of your mobile phone bills as possible. For this to be effective, your records needs to be seamless. Ironically, the higher your bills are, the better for you. After all, it shows that you’re capable of paying off even pretty big sums.
Credit card instead of credit rating
So, you don’t have a credit rating. As we mentioned, that’s an issue. But it’s not insurmountable. There’s a way even students can build up a score pretty quickly. And it’s not very hard.
Start by applying for a credit card. If you’re affluent enough to set up a regular checkings account, you’re half way there already, as most of these come with a credit card. If this is not possible for you, try to apply for a prepaid credit card. This is a debit card which can also be used as a credit card.
Then, use this card to pay for as many of your purchases as possible and keep your balance clean. In doing so, you will gradually build up a credit rating which financial institutions can use to assess your risk.
Obviously, the predictive value of this rating is limited. After all, you will probably only be making smaller purchases. But among the various options, this is one of the best to improve your chances of a student loan.
Bigger down payment / co-signing
Even if you have a spotless record for your phone bills and even if you’ve paid off all your credit card debt, student car loans remain risky for banks. To meet them half way, consider increasing your down payment.
This is not as difficult as it may seem. Parents may be prepared to assist with a bigger down payment. Sometimes, even relatives are happy to chip in for you to realise your dream of limitless transportation.
The more sizable the down payment, the better your chances for a student loan.
The same goes for finding someone to co-sign your contract with you. In case you do need to default on the loan, the co-signer pledges to meet your obligations. This makes it a lot easier for the bank to agree to a deal, especially if the co-signer has a great credit rating.
Get a job
Although your studies are like a job in their own right, getting at least a small regular income is helpful. Not only will it give you some practical experience after many hours spent in class rooms and libraries. It also creates a steady stream of income which signals to banks that you are capable of generating your own money.
Ideally, you’re looking for jobs that pay well for small amounts of working hours. It won’t be easy. But just like finding a student car loan, neither is it impossible.