Financing a Vehicle as a College Student
SaveThis article will teach you all you need to know when it comes to financing a vehicle as a college student.
By Ian Whitmore
Should You Finance a Vehicle During College?
As a new college student, you will likely find that you don't necessarily need a vehicle, especially during your first couple years of school. Most college campuses are very pedestrian-friendly and offer bike racks for those who want to ride to class on two wheels. Good cars are not cheap, especially when you are already on a tight budget and/or don't have a full-time job. Parking on campus can be crowded and expensive, vehicle maintenance and repairs require attention and money, and monthly costs like gas and insurance are unpredictable and can really add up. However, if you live far off campus or have a part time job or internship that you can't easily get to without a vehicle, you may decide that you need a car.
Look at your transportation needs and consider whether it makes financial sense to purchase and own a vehicle. If you already have an older car, consider if it makes sense to keep driving it, even if it doesn't look great or lacks newer features. If you need to buy a car, look around to see if there is anything that you can afford to buy outright. Although used cars have gotten more expensive, it is still possible to find good deals. Ask friends or family if they have a vehicle that they would consider selling. If you don't need a vehicle currently, but plan to get one in the foreseeable future, set aside money every month so that when you do get a car you can either buy it without a loan or make a bigger down payment.
Car Loan Basics and Terminology
If you determine that it would be best to purchase a car and you don't have any non-loan options available to you, you may need to take out a car loan. Auto loans are commonly offered by financial institutions, and in some cases, you can even get a loan through the car dealership itself. Remember that cars typically become worthless, or "depreciate" as they get older, so you'll want to educate yourself as much as possible, so you don't pay too much for something that loses value over time. Let's go over some basic loan terminology. Many of these terms are relevant for other types of loans as well, so it's good to memorize them and understand what they mean:
- A down payment is the amount of money that you pay out-of-pocket. Ideally, you'll want to have at least a 20% down payment for a new car or a 10% down payment for a used car. Keep in mind that you won't have to pay interest on the money that you put down since it's already yours, so try to put down the largest down payment that you can reasonably afford.
- The principal is the amount of money that you are borrowing from the lender to cover the cost of the car and any related taxes and fees. For example, if you buy a car that costs $14,000 including taxes and fees and you make a down payment of $4,000, you will need to borrow $10,000 from the lender. Thus, the principal is $10,000.
- The loan term is the amount of time (usually in months) that you have to pay back the loan. For example, you may have an auto loan with a term of 48 months (4 years). Loans with longer terms tend to have higher interest rates than loans with short terms.
- The interest rate is the percentage of the loan amount that you will pay each year to the lender in exchange for the ability to borrow money. Simply stated, an interest rate is the cost of borrowing money. A higher interest rate means that the money is more expensive to borrow while a lower interest rate means that it's cheaper.
- The annual percentage rate or APR is similar to the interest rate, but more useful because it includes both the interest rate and any fees or charges included in the loan. APR is expressed as a percentage, making it easy to compare APR between different lenders. In short, the APR represents the total cost per year to borrow a sum of money.
- The total cost is the amount of money that you will pay including the down payment, principal, interest, taxes, fees, and any additional charges. Keep in mind that taxes, fees, and assorted charges can easily run up to hundreds or even thousands of dollars.
Loan Factors and Where to Find a Loan
When shopping for an auto loan, you should know that there are several factors influencing the interest rates that you can get. These factors include your credit score, the loan term, the size of your down payment, the age and value of the vehicle that you purchase, and the type of lender.
Obviously, you will want to try to find a loan with the lowest interest rate and APR possible, so shop around for the best deal. A good place to start is at a bank or credit union where you have an account. Financial institutions will usually have better interest rates than dealerships, since dealerships add a markup to the loan in exchange for setting up the financing for you. Credit unions tend to offer highly competitive interest rates and are often a great option for auto loans. You don't necessarily need to have an account at a particular financial institution to get an auto loan from them, so shop around at different banks and compare interest rates. Be sure to look at the APR as well to account for added fees and loan charges. When applying for a loan, the lender will look at your income, your down payment, your credit score and payment history, and other things. Make sure that you have enough income to easily cover the monthly payments on the loan.
Other Things to Remember and Consider
If you have a loan on a car, you will almost certainly need to have comprehensive and collision insurance coverage on the vehicle. If the car gets damaged or stolen, the lender wants to make sure that they can recoup the cost of the loan. Insurance rates can vary a lot based on your driving history, your age, the type of vehicle, where you live, and other factors. Be sure to get insurance quotes before you buy a vehicle to make sure you can afford the necessary coverage. If you want to sell the car before the loan is paid off, check with your lender to see what the process is. Usually, you will need to collect the money from the buyer and pay off the loan before the lender will release the title to the new buyer. If you stop making payments on the loan, the lender may come and take the car back, a process known as "repossession." Besides being massively inconvenient and embarrassing, having a car repossessed can damage your credit score and increase the cost of getting future loans, so only take out a loan that you can comfortably pay back and make sure to stay on top of the monthly payments.
Finally, remember to read the fine print and full terms on any loan that you take out, and don't be afraid to do more research or ask for help before committing. It is very likely that someone you know has taken out an auto loan before and can give you advice or help you through the process. Don't stress about it too much; with the right knowledge you will easily make it through the process of getting your first auto loan!
Ian Whitmore
Ian Whitmore was born and raised in Austin, TX and spent his childhood and teen years immersed in the rich cultural scene of Austin and the beautiful landscapes of the surrounding Hill Country. He graduated from Wyoming Catholic College in 2020 with a B.A. in Liberal Arts.Articles & Advice
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