Going to college represents an exciting time in your life for many reasons, most notably your newfound independence. You’ll no longer rely on mom and dad for your basic needs and will begin providing for yourself. Because of this, you might be in the market for your first car and your first car loan.
Borrowing money to purchase a car is a big responsibility, and there are several options available for financing. Read on to learn what you need to keep in mind about purchasing your first car and how a car loan works.
Before You Buy: Do Your Research
While it may be tempting to buy a car the moment you plan to head to college, remember to do your homework first. To get started, you’ll want to contact your school to make sure you can take your car to campus. If you’re a first-year student, you may be out of luck. A number of schools do not permit first-year students to bring cars with them to campus.
If you’re able to take your car to school, you need to plan not only for your monthly car payment, but related expenses as well, such as:
- Car insurance
- Campus parking fees or registration
- Off-campus parking fees, if applicable
- Oil changes, tires, and general maintenance
- Fuel costs
Be sure to take all of these expenses into consideration when you build your budget. You need to be able to comfortably afford to pay for them in addition to your monthly car payment.
How Do Car Loans Work?
Before you head to the dealership, you’ll want to calculate how much car you can afford to give yourself a better idea of what price will work best for your budget. Most car purchases are made by securing a loan, as most people aren’t able to pay the full price of a car up front. The buyer takes a loan from a lender, then gives the seller the money for the car. This makes the buyer responsible to pay back the amount of the loan at a certain interest rate for a predetermined number of months.
Here’s how this scenario might play out. You buy a $10,000 car. You make a $1,000 down payment, so you need to finance $9,000. The lender charges an interest rate of 2.49 percent, and you agree on a term of 36 months. Each month, you’ll be responsible for paying a portion of the balance as well as interest. Over the term of the loan, you’ll work toward paying off the loan balance.
Before applying for a loan, you’ll want to determine what your monthly payment will be. Keep in mind you must be able to handle these payments to enter into the loan agreement. Defaulting, or not making payments on the loan, can cause other problems, such as getting your car repossessed and damaging your credit.
Some car dealerships will try to help you finance a car over a longer period of time to help make your monthly payments lower. While this could be a good option for you depending on your finances, you’ll want to make sure you’re not overpaying for the car because of all the extra interest you’ll need to pay due to the longer loan term.
Can Getting a Car Loan Improve My Credit Score?
When reviewing your loan application, lenders will take your credit score into account as a factor in determining whether or not they’ll lend you money. This three-digit number is based on your payment history, amount of debt owed, length of credit history, credit mix, and new credit.
Typically, college students may not have much credit history, which may negatively affect their scores. That’s why many college students have their parents co-sign for their car loans. This ensures that someone who has proven responsible in the past will oversee the payments and be liable for paying back the loan if you default. Co-signers are usually parents or guardians who can vouch for your ability to take on debt. When you have a co-signer, your actions impact them. If you fail to pay, they quite literally pay the price for your negligence.
By taking on a car loan and managing it responsibly, you have the opportunity to build up your credit score and begin to develop good money management habits that will help you prepare for future financial undertakings, such as purchasing your first home.
Here are some benefits of getting a loan and developing a good credit score:
- The sooner you start building credit, the longer your credit history will be.
- Making monthly on-time payments will prove to future lenders that you can handle responsibility.
- After graduating, you may find it easier to be approved for an apartment because many landlords run credit checks before renting.
Car Loans From PSECU
If you’re a college student and find yourself in need of a car, consider joining PSECU. We offer competitive rates on car loans and have on-campus Financial Education Centers at many colleges and universities across Pennsylvania. Get started by applying for membership today.
For more tips on managing your money, visit our WalletWorks page.