Some are outright denied, while others might only be approved for smaller loans or face obscene interest rates.

Fortunately, there are steps that student loan borrowers can take to increase their chances of securing an approval and a fair interest rate.

Car Loan Basics for Student Loan Borrowers

Student loans affect buying a car in a couple of ways.

Firstly, your student loan repayment history influences your credit score. If you’ve missed payments or defaulted on your student loans, securing a car loan can become more difficult.

Secondly, student debt heavily impacts your debt-to-income ratio. The more student debt you have, the less favorable your debt-to-income ratio appears to lenders.

However, there’s a silver lining for borrowers. There are strategies to significantly improve your debt-to-income ratio without having to reduce your loan balance.

Improving Your Debt-to-Income Ratio (DTI)

The key to understanding Debt-to-Income (DTI) ratios is that lenders focus on your monthly finances rather than your total debt. In other words, the critical numbers here are your monthly debt payments compared to your monthly income.

Lowering your monthly student loan payment can improve your DTI ratio. One way in which this can be achieved is by applying for a new repayment plan.

For those with federal loans, using the new SAVE plan can be a great way to enhance your credit standing.

The one exception to the rule is for borrowers who qualify for $0 per month payments. In these cases, many lenders may treat this as if you’re in deferment or forbearance, and they might calculate your monthly payment as 1% of your total loan balance for DTI purposes. This assumption can significantly worsen an otherwise healthy DTI ratio.

Car Loan Quarks to Understand

If you are applying for a mortgage, there are numerous borrower protections and uniform standards that apply. The student loan impact on mortgage applications is much easier to understand. It also clarifies how a student loan tweak could improve a mortgage application.

By comparison, car loans are slightly less predictable. In some cases, car loans offer excellent terms to the consumer because the car loan is being used to help facilitate a car sale. In other cases, the car price is an afterthought because the dealer really wants you in a profitable car loan.

Some consumer protections with auto loans exist, but buyers should still exercise great caution.

Each lender has unique standards for deciding who gets a loan and what rate they receive. Like anything else, shopping around is essential for getting a fair deal. It also means that tweaks to improve your application might make a big difference with some lenders, while it doesn’t move the needle at other lenders.

Managing the Timeline

If you sign up for SAVE or choose a new repayment plan to help your auto loan application, it is critical to remember that the changes do not happen immediately.

First, the loan servicer has to process the application and update their system. Once the repayment plan application is processed, the borrower still has to wait for the new monthly payment to get reported to the credit bureaus. This reporting typically only happens once a month.

Because the entire process can take a couple of months, it is essential to do it in advance of financing your next car purchase.

Sherpa Tip: In an ideal world, consumers would be able to give the lender the new monthly payment and have their application adjusted accordingly. Sadly, because almost all credit decisions are now done by a computer, providing additional information usually doesn’t make a difference. That said, it never hurts to try.

Private Student Loans and Auto Applications

Unlike federal loans, which have a variety of repayment plan options, private loans are more limited.

In many cases, a borrower cannot adjust their monthly bill.

The best option to improve DTI figures for private loans is to refinance the loan. In many cases, borrowers can secure a lower interest rate and lower monthly payments. In the current interest rate environment, the 20-year fixed-rate loan is the best choice for most borrowers. For those who are refinancing to improve their DTI, it is almost certainly the best option.

As of November, 2024, the following lenders advertise the lowest interest rates on 20-year fixed-rate loans.

Rank	Lender	Lowest Rate	Sherpa Review
1		6.08%*	Splash Financial Review
2		6.53%	ELFI Review
3		6.55%	Laurel Road Review

Other Considerations for Student Loan Borrowers Buying a Car

• Credit cards can have a massive impact. Unlike student loans, paying down a portion of your balance can lower your minimum monthly payment. If you are struggling to get approved for a decent loan, paying down credit card debt might be the best path forward.

• Switching repayment plans again. Once the car loan is secured, borrowers can return to their original repayment plan with a higher monthly payment. Alternatively, they can pay extra each month to pay the loan off as planned but keep the low minimum monthly payment for added flexibility.

• Make sure the car purchase is a good one. Auto prices are exceptionally high right now, and many people depend on a car to get to work. This is a recipe for making a regrettable mistake. Don’t let a dealer coerce you into making a purchase you cannot afford. Take your time to make a smart decision.

The post The Student Loan Borrower’s Guide to Getting a Car Loan appeared first on The Student Loan Sherpa.

Auto loans typically have shorter repayment periods, which means higher monthly payments. Conversely, student debt can be a particularly daunting due to the array of available repayment plans and forgiveness programs.

Unfortunately, there’s no easy answer to deciding which debt should be tackled first. Instead, borrowers should weigh a few critical factors to make the best decision for their financial situation.

Factor #1: Monthly Debt-to-Income Ratio

If a home purchase is in your future, considering how much debt you have in relation to your income is crucial. Even if you don’t plan to buy a home anytime soon, the impact of your monthly finances is still important.

Car loans usually have a shorter repayment period than student loans. While most student loans come with repayment plans of 10 years or more, auto loans normally span around five years. Because auto loans are repaid faster, a higher monthly payments are required. Therefore, if your goal is to maximize monthly cash flow, paying off your car loan could be the most effective strategy as it would free up more money each month.

If you’re a potential home buyer, this strategy could lead to qualifying for a larger mortgage. If you aren’t, paying off your car loan sooner can greatly increase your monthly disposable income.

[Further Readings: The Sherpa Guide to Buying a Home with Student Loans]

Factor #2: Interest Deductions

In your financial calculations, don’t overlook the student loan interest deduction.

As long as your income is not too high, you can deduct up to $2500 of student loan interest from your taxable income each year. While the savings might amount to no more than a few hundred dollars, this tax benefit could influence your decision in favor of prioritizing the loan that doesn’t offer such a deduction.

Factor #3: The Mental Standpoint

Human psychology plays a crucial role in managing debt, as our motivations significantly impact how effectively we save money and tackle our loans. If you’re particularly motivated to pay off a loan, you’re likely to save more diligently and make greater strides in reducing your debt.

For instance, if your student loans have been a source of major frustration or you’ve had negative experiences with your lender, using that frustration as motivation can help you pay off your loan faster. The sooner your loan is paid off, the sooner your lender stops profiting from you.

On the other hand, you may hate having a car payment. The idea that you are paying interest on a loan for an asset loses value every day may drive you nuts. Paying off your car loan can provide a sense of satisfaction every time you drive, knowing the car is fully yours.

Your specific motivators may differ. There are any number of reasons why you might prioritize paying off one debt over another. Maybe you’re eager to release a co-signer from their obligation, believe student loans are unlucky, or worry about your car breaking down. Whatever your reasoning, identifying a strong personal motivation to eliminate debt is a significant factor worth considering.

Factor #4: Refinancing Options

One potential wildcard in your analysis is the possibility that the interest rates on one or both of your loans could be reduced.

If there’s been an improvement in your income or credit score since you originally took out your loans, you might be well-positioned to secure a lower interest rate.

For example, suppose you owe $15,000 each on your car loan and your student loan. If your student loan has an 8% interest rate and your car loan has a 6% rate, it seems sensible at first glance to prioritize paying off the student loan first.

However, if you’re able to refinance your student loan with one of the refinancing companies offering rates around 5%, then it suddenly becomes more strategic to pay off the car loan first while securing a lower interest rate for your student loan.

Bottom Line: No Easy Answer Between Paying off Student Loans or a Car Loan First

Interest rates should be an important factor when you put together your debt repayment plans. However, they shouldn’t be the only factor.

If you look at the big picture, you may find a route that makes you happier and saves you money in the long run.

Next Steps:

• Consider other goals – Car loans and student debt are only part of the equation. Think about other priorities, like saving for retirement or buying a house.
• Know your repayment options – The variety of repayment options on federal student loans can create flexibility. Use the Department of Education’s Federal Repayment Simulator to explore different choices.
• Refinancing private debt opens doors – Borrowers can refinance to get lower interest rates or lower monthly payments. This page tracks the best student loan refinance rates currently available.

The post Should I pay off my car loan first or my student loans? appeared first on The Student Loan Sherpa.