Buying a Car When You Have Student Loan Debt

You’ve just graduated, with a crisp new diploma you’re ready to take on the world and are excited for your first day of work at your new “adult job”.
You want to drive to work in your own car rather than your parent’s old ride – but can you afford it?
Statistics overwhelmingly say no.
Today, in addition to their exorbitant student loans, graduates are sliding further into debt due to rising car prices. The average new model costs in excess of $31,000, with even small sedans approaching the $20,000 mark when fitted with basic features.1

So what do you do? With a little planning and research, it’s definitely possible to qualify for an auto loan and get yourself a new ride without sliding into insurmountable levels of debt. Yes, there’s a lot to consider, but luckily, there are lots of options out there as well. Let’s explore some important financial considerations for buying a car, as well as some techniques recent graduates can use to prepare for the purchase.

Deciding to Buy a Car During Repayment

The first big decision you have to take is whether to buy a new or used car. Both options have their fair share of advantages and disadvantages.

Are New Cars Worth It?

Buying a new car means you can get the newest technology like Apple CarPlay and Bluetooth phone connectivity. You will also likely have all of the advanced safety features like autonomous emergency braking, adaptive cruise control, blind spot monitoring, and lane departure warning, which older used cars will probably lack. New cars boast improved fuel efficiency, often contributing to reduced fuel costs overall. They also come from the factory with warranty coverage for at least the first three years or 36,000 miles, whichever comes first.
On the other hand, choosing a new vehicle means you pay much more than a comparable used model. Because its value is higher, you will pay more in sales tax as well in insurance.

Secondly, according to US News “It’s not unusual for a new car to lose 20 percent of its value the moment you drive it off the lot, so if you don’t pay at least 20 percent down, you’re liable to owe more to your lender than it is worth.”2

What About Used Cars?

The biggest advantage to buying a used car is that the original owner will have absorbed the cost of depreciation that occurs in the first few years of ownership. Thus, you will be able to save a substantial amount on the cost of your car. You can either budget a lot less for your vehicle or take your initial new-car budget and use it to buy a much fancier used model than you would have been otherwise able to. Since used cars are lower in cost, you can save on tax and insurance premiums. In terms of auto loans, you’ll likely save on interest as your total loan amount that you’re paying interest on will be lower. Used cars, if well inspected, are great options for financially strapped graduates.2

On the flipside, you’ll have to spend on the pre-purchase inspection from an independent mechanic to identify any operating issues with the car. If the car is very old, it’ll be unlikely that any warranty is leftover, so you might be financially liable for any major repairs in the future. On the flipside, you’ll have to spend on the pre-purchase inspection from an independent mechanic to identify any operating issues with the car. If the car is very old, it’ll be unlikely that any warranty is leftover, so you might be financially liable for any major repairs in the future.

However, if you opt for a factory pre-owned car or certified pre-owned car, you might be able to take advantage of an extended warranty.3 A dealer with the support of the vehicle’s original manufacturer can offer this type of car for sale. The original manufacturer uses the dealership to inspect the used vehicle. The dealer uses a checklist to determine if the vehicle in good enough condition to certify – if it passes certain tests, it will earn an extended warranty.

While a factory pre-owned car is a great option in terms of the warranty, it’s important to note that not all dealerships have the same checklist and tests for certifying cars. Before choosing this route, you should review various certification programs to see which one offers the most complete coverage. A certified pre-owned car is ideal for those who want to save money while also having the luxury of a longer warranty. Even though their base price can be more expensive than non-certified used cars that you can buy from dealers or private parties, they often come with financing deals that don’t apply to the wider used car market.4 Nonetheless, whether factory pre-owned or otherwise, used cars don’t necessarily allow you to be as particular with features and packages compared to a new cars, but you can potentially save more money in the long run with a used car purchase.

Budgeting for the Down Payment

Much like buying a house, one of the biggest hurdles to overcome before buying a car is saving for the down payment. In a study by, researchers found that the typical American household in many of the U.S.’ larger cities doesn’t earn enough to afford the average new car. They followed the “20/4/10” rule – meaning that a potential buyer should be able to afford a 20 percent down payment, a four-year loan, and make payments comprising 10 percent of their household’s income to afford a new car.5

This is not easy for most, even without the added burden of having student loans to pay off . To prepare for the down payment, you will need a graduated savings plan. This means that you can put most of your discretionary income towards debt while also saving the rest for a car. For this, you will need to create a timeline, and as you continue to pay down your student loans, over time you will pay less on your loans as they decrease and be able to save towards your auto payment.

Getting an Auto Loan

Step 1: Do Your Research

It’s likely that you will need an auto loan and so, it’s imperative you learn all about different auto loan options. When comparing loans, you need to focus on the annual percentage rate (APR). A lower rate can lead to long-term savings. You also need to consider the term of your loan. While a shorter term means higher monthly payments, it will yield in less money being paid overall. A longer term will spread out the payments and might seem more affordable at first, but remember, you’ll be paying for a much longer time, with interest.

Step 2: Know Where To Look

There are may places from where you can apply for an auto loan. If you have a relationship with a bank, a local branch is a good place to start. Banks generally have specific loan policies and often cater to people with good credit standing. Credit unions operate like banks, but due to lower operating costs, they may be able to lend money at lower rates than what a bank charges. Sometimes you might need to be a member of a credit union to get a loan from one.

Another option is an online lender. These are very competitive and convenient to use, as long as you’re okay with sometimes being bombarded with phone calls and emails from lenders you might not have even contacted. It’s important to check any website’s privacy policy before parting with personal information, especially when it comes to financial matters such as loans. Finally, you could also approach your car dealership itself to arrange a loan, upping the convenience factor. Be aware that dealerships may quote rates that include markups, making the loan more expensive. No matter which avenue you choose for an auto loan, you will need to do your homework and research your options well in advance.

Step 3: Get Pre-Approval

After you’ve shopped the marketplace for loans, you’ll want to get pre-approved. Doing so brings peace of mind, and even if you haven’t found the best deal possible, you will know you have enough money to cover your car purchase. You will also have clarity in terms the interest rate and loan term and can start to plan your payments sooner rather than later. To get pre-approved, you will need a estimate of your car cost as well as taxes and fees, minus the down payment.6 This way you’ll learn how much you actually need to borrow.

Managing Your Student Loans

Even after all this, you might still not be able to afford the car you want due to student loan debt. You may want to consider student loan consolidation or refinancing as a way to take more control of your debt well as to free up income to save toward a down payment. Loan consolidation can occur in one of two ways: either federally through the U.S. Department of Education’s Direct Loan Consolidation Program, or through a private lender (known then as refinancing).
Refinancing can be beneficial in that, it will allow you to make one monthly payment towards your student loans as opposed to managing many, and often yields a lower interest rate.

As a recent graduate, you need to consider how buying a car fits in with your other bills. As appealing as it is to get yourself a new ride, you wouldn’t want your purchase to break your bank account. Whenever you are adding more loans to already existing debt, you need to be on top of your finances so that you can make all the required repayments on time – both student loans and auto loans. With these tips and proper money management, you should be able to buy a car even with student loan debt.



Please note that the information provided on this website is provided on a general basis and may not apply to your own specific individual needs, goals, financial position, experience, etc. LendKey does not guarantee that the information provided on any third-party website that LendKey offers a hyperlink to is up-to-date and accurate at the time you access it, and LendKey does not guarantee that information provided on such external websites (and this website) is best-suited for your particular circumstances. Therefore, you may want to consult with an expert (financial adviser, school financial aid office, etc.) before making financial decisions that may be discussed on this website.