A Guide to Car Loans for Young Drivers
Young drivers face unique challenges when getting a car loan but can improve their chances with good credit, a cosigner, and opting for a smaller lender.
Written by Sarah Gray
Reviewed by Jessica Barrett
Table of Contents
- How do car loans work?
- What makes it hard to get a car loan as a young driver?
- How to get a car loan as a young driver
- Save on car insurance with Jerry
- FAQs
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Young drivers face unique challenges when applying for car loans due to low—or no—credit and often unreliable income. But young drivers can improve their lending odds by building their credit history, getting a co-signer, or checking out smaller lenders like credit unions.
Being young has a lot of benefits, but getting a
car loan
with ease is not one of them. Whether you understand the lending process or not, many lenders are less willing to do business with young clients who have yet to establish a solid credit and earnings history. But that doesn’t mean you can’t get your dream car—or that you have to figure out how to pay for it with cash. Young drivers can (and often do) get car loans, and
car insurance
broker app Jerry
is here to help you through the process. This guide examines the unique challenges young drivers face when applying for loans and how you can overcome those challenges (and save on insurance with our
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How do car loans work?
A car loan is a
secured loan
that allows a borrower to pay off the cost of a vehicle over a set period of time. Whether you borrow money from a bank or other lender to buy a car, you agree to pay the full amount for the vehicle, plus interest
, via monthly payments over a set loan term
. A secured loan uses collateral as security against any loss the lender may incur by loaning you money. In the case of a car loan, the car itself is the collateral—this means that if you don’t make your monthly payment, your lender can
repossess your car
. But as long as you make all your payments on time and in full, the car is all yours at the end of the loan term.Making a loan for thousands of dollars can be a big risk. That’s why lenders need to see proof that you not only have the means to make your monthly payments, but also that you have an established history of making good on your debts. This means they look at your debt-to-income (DTI) and credit score, which are two areas in which many young drivers often struggle.
Advantages of car loans for young drivers
Though young drivers face some unique challenges when getting car loans, they also have a few advantages that they can take to the proverbial bank:
- Lenders—especiallysmaller lenders—are often willing to take a wider view of your circumstances, considering things like GPA, if you’re a student, and personal credit references that they may not consider for more established borrowers.
- If your youthful status also means you’re in school and close to graduation, you may be able to take advantage of special rebates and other dealer incentives that can help offset the cost of financing.
- Especially if this is the first loan you’ve ever taken out, this will be a great chance for you to start building your credit.
MORE: How to get cheap car insurance for young drivers
What makes it hard to get a car loan as a young driver?
Young drivers may find themselves in a less favorable position than other borrowers through no fault of their own. Here’s why:
- Yourcredit scoreis key, and young drivers haven’t had a lot of chances to establish good—or any—credit. This means you’re less likely to be approved for a loan.
- To get a loan, you have to show that you can pay it back. If you’re fresh out of high school or you haven’t established yourselfin a career yet,it can be difficult to verify your income. Again, this makes you less likely to be approved for a loan.
- While you haven’t had much time to rack up debt, you also haven’t had many opportunities to build your savings. You likely won’t be able to put down much of a deposit ordown payment—which is one of the easiest ways to improve your approval odds.
These challenges don’t have to stop you from applying or being approved for a car loan. If you’re a student, you may be able to use a good GPA as proof of your responsibility. If you’ve ever borrowed money from an individual or business, request a credit reference letter, which you can use to help boost your chances of approval.
Key Takeaway Young drivers may have low or no credit, which can hurt them when applying for car loans—but many lenders are willing to consider additional means by which to verify if you’re a favorable lending candidate.
How to get a car loan as a young driver
Securing a car loan in your 20s—or at 18 or 19—is difficult, but not impossible. This is what you’ll need to do to have the best chance of getting a loan as a young driver.
Take stock of your credit and finances
First, consider your finances, including your credit score. If you’ve never had a credit card or a loan, you won’t have a credit score yet, but even getting yourself an Amazon store card will signal the
Experian
, Equifax
, and Transunion
gods to begin monitoring your usage. Credit age and utilization are the two biggest factors in calculating a credit score. This means you’ll want to be sure you keep a low utilization percentage and a good payment history to offset the negative effects of your short credit history.
Experts generally recommend a credit score of 661 or higher for a car loan. That doesn’t mean you can’t get approved if your score is lower, but you’re likely to get a high interest rate. If your credit score is below 500, you’re not likely to get approved for a loan at all.
Once you’ve reviewed your credit score, you should calculate your debt-to-income (DTI) ratio. Lenders calculate your DTI by dividing the total cost of your monthly bills by your monthly gross income. Lenders typically will not accept a ratio higher than 45% to 50% percent, but an ideal ratio is between 28% and 36%.
So—if taking out a car loan will mean you’re using up more than half of your monthly income on bills, you’re not likely to get approved.
Key Takeaway If adding a car payment to your monthly expenses means you’ll use over half of your gross monthly income on bills, you’re not likely to get approved for a car loan.
Consider a loan from a credit union
Many new buyers think the only way to finance a vehicle is through the dealership, but that’s far from the truth. You can get car loans from banks, credit unions, and online lenders, as well.
For new borrowers, credit unions can be a great option since they often offer lower interest rates than traditional banks. Plus, credit unions are customer-owned, so they can be more flexible than larger banks when it comes to unique situations.
Consider a co-signer
One of the best ways to improve your approval odds and to help you begin establishing credit is to get a co-signer on your loan. When someone co-signs or guarantees your loan, they promise to take over payments if you’re unable to keep up with your debt. This means the lender will look at their established credit history and use it to help you get approved.
Be prepared to wait for the best deal
While you have a lot of options to consider when overcoming the challenges young drivers face in taking out car loans, it’s still important to be realistic. Your finances simply may not be able to handle the addition of a car payment right now.
If that’s not the case, and you can’t find a co-signer, your best bet may be to wait while you build your credit and save up for a down payment.
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FAQs
Can I get a car loan as a young driver?
Yes. The only “rule” when it comes to getting a car loan when you’re still young is that you need to be at least 18. Beyond that, it’s actually illegal for lenders to consider your age during the lending process.
Can my age affect my interest rate?
Not exactly. While it’s illegal for a lender to charge you a higher interest rate just because of your age, they can—and will—apply a higher interest rate to a loan made to someone with a comparatively brief credit history. In other words, they take your credit’s age—not your own—into consideration.
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