Interest rates for student car loans are usually higher than loans for more experienced borrowers. There are a number of reasons due to which the interest rates are higher for student car loans. First of all, there is less probability that a student has a verified and stable income so this can be a sign of risk to a lender.
Second thing is that, due to their age student borrowers have less probability of having assets that can secure their car loans. The last thing is that, student borrowers have short credit histories, so it is difficult for a lender to believe that they are able to make payments on the loan. So due to the all above mentioned factors those students who want to apply for a car loan, should expect high interest rates.
There are certain ways with which you can considerably lower your interest rate on car loans. Below I have mentioned few of them:
Subprime Car Loans for students
The offers of sub prime car loans might hit your email inbox. But a student should keep in mind that this is not the best choice. There are several reasons as to why am I saying this. Banks offer a sub prime loan at an initial rate which is much lower than the rate that banks pay in order to borrow funds. This initial rate is known as the national prime rate.
The bank will loose money on the deal for the first few consecutive years of the loan. So what the banks do to make up for this loss? They will raise the interest rate to a very high level after the introductory period is over. Due to the reason that students think that the rate increase could happen after they graduate and earn an income so this offer attracts most of the students. Despite of all the facts, the best thing that you can do is you should cap that in this possible scenario how high the rate can raise.
Cap your rate, percentage above National Prime Rate
A variable rate loan might prove to be a reasonable idea for a student if in case he or she is able to cap that how high a loan will raise above the national prime rate. You have to make sure that your loan is never more than a few percentage points above NPR.
By capping the highest possible rate that loan can reach you guarantee that your loan rate is not out of line with national averages. However, you will have to settle for a worse possible rate that you might incur. You have to keep in mind that you might be a high risk borrower, and so in order to mitigate the risk you have to decide that an interest rate 3% or higher above prime is reasonable.
Fixed Rate Students Loans
It is difficult to find students loans at a fixed rate, but students prefer these loans more as compared to any other loans. Here for these loans also you can use the national prime interest rate as a baseline to have an idea of the rates that you can get for these loans.
You can get further lower rate by choosing a short-term loan, such as a three or five year loan rather than a seven year loan. On a fixed loan you have the option to lower down your rates by putting a larger down payment in order to reduce the sum that you will owe.
Student Loans with a Cosigner
You can get lower interest rates by applying for a loan with a cosigner. However there are some disadvantages of using a cosigner. If you have a cosigner on the loan then the loan will not help your credit score improve as quickly when you pay it off as it will if you don’t have a cosigner. Despite, if you are only willing to have a lower interest rate, then a cosigner can greatly help you to get much cheaper loan. So you should consider convincing a parent or family member to become a cosigner on your student car loan. If your cosigner has very good credit then you can qualify for a standard interest rate.