Sunday, June 10, 2012

Interest Rate Ranges for Student Car Loans

Student car loans will usually have higher interest rates than loans to more experienced borrowers. This occurs for a number of reasons. First, students are less likely to have a verified and stable income which can be a sign of risk to a lender. Second, student borrowers likely have a lack of assets due to their age. Finally, student borrowers tend to have short credit histories, giving a lender little reason to believe they can make payments on the loan. Based on these factors, you can expect elevated interest rates.

Subprime Car Loans
Students may receive offers for a subprime car loan. This is not the best choice for several reasons. A subprime loan is offered at an initial rate much lower than the rate banks pay to borrow funds, called the national prime rate. For the first few years of the loan, the bank will be losing money on the deal. To make up for this loss, the bank will raise the interest rate to a very high level after the introductory period. Students may be attracted to this option because the rate increase could happen after they graduate and earn an income. However, it is best to cap how high the rate can climb in this scenario.
Percentage above Prime
If you can cap how high a loan will climb above the prime rate, a variable rate loan may be a reasonable idea for a student. Assure your loan is never more than a few percentage points above prime. This will guarantee your loan rate is not out of line with national averages. However, only you can judge whether or not your credit score means you will have to settle for a worse rate. You may know you are a high risk borrower, and you may have to decide an interest rate three percent or higher above prime is reasonable.
Fixed Rate Loans to Students
Loans to students at a fixed rate may be harder to find, but they will generally be more desirable. You can still use the national prime interest rate as a baseline for your estimate of the rates you should be able to receive. You can score a lower rate by electing for a short-term loan, such as a three or five year loan instead of a seven year loan. You can also lower the rate on a fixed loan by providing a larger down payment to reduce the sum you will owe.
Student Loans with a Cosigner
A cosigner is one option to keep your rate low. There are some downsides to using a cosigner. The loan will not help your credit score improve as drastically when you pay it off if you have a cosigner on the loan. However, in terms of interest rate, a cosigner will help make your loan much cheaper. Consider using a parent or family member as a cosigner on your student car loan. This should qualify you for a standard interest rate if your cosigner has very good credit.

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