Student loans can affect all aspects of your financial life, including your decision to get a car. Your student loan payments can impact how much you can afford in monthly payments, whether or not you can make a down payment, and whether you should buy or lease.
Here’s what you need to know about each option and some things you should consider with your student loans.
Buying vs. Leasing a Car
If you’re looking to get into a new (to you) car, you may be wondering whether you should lease or buy. Both options have benefits and drawbacks, so it’s important to understand how each one works and when one might be better than the other.
Buying a Car
When you buy a car, it’s yours. You can drive it as much as you want, make changes to the interior and exterior, and keep it as long as you wish.
If you finance the vehicle purchase with an auto loan, your lender will hold onto the title until you’ve paid the debt in full. But they won’t require much from you other than sufficient insurance coverage.
Buying is an excellent option for people who want to keep the car for a long time. It’s also the better choice if you don’t want to deal with mileage limits, a strict maintenance schedule, and other potentially restrictive requirements.
However, if you’re comparing the monthly payment for buying and leasing the same vehicle model, buying will cost you more.
Finally, you can choose to buy a new or used car, but leasing is typically only available on new cars. So if your budget is extremely tight, buying an inexpensive used car is likely your best bet.
Leasing a Car
If you’re wondering how leasing a car works, it’s similar to renting a vehicle, just for a longer period of time — typically two or three years. Leasing can give you the chance to get into a new vehicle for less than it would cost to buy it. This is because you’re essentially paying for the car’s depreciation over the course of the lease with interest.
So how does leasing a car work? Pretty similarly to buying one. You’ll visit a dealership, pick the car you want, take it for a test drive, and start the paperwork.
One thing to keep in mind is that leases can have very restrictive contracts. You’ll need to agree to annual mileage limits, and if you go over, you’ll be charged for each additional mile you drive. You also need to keep the car in near-perfect condition throughout the lease. Otherwise, you might be slapped with a fee when you return it.
And unlike buying, when you’re done with a lease, you don’t have any equity in the car, which you could put toward a down payment on your next vehicle purchase.
Leasing or Buying a Car with Student Loan Debt
Whether you’re thinking of buying or leasing a car, it’s crucial to keep your student loan debt in mind throughout the decision-making process. Here are some specific things to consider.
Budget
Monthly student loan payments will limit how much you can put toward a monthly payment on an auto loan or lease. It could also impact your ability to save for a down payment, which is a good idea with both options.
If your budget is limited, buying a used car may be the best option. But if you have some room in your budget for a new vehicle, leasing will cost less money per month than buying, which can make it a better short-term solution, even if you generally prefer buying.
Credit
Your student loans will impact your credit history for better or for worse. If you’ve missed payments, for instance, your credit score may not be in good enough shape to qualify for a lease, which typically requires good credit.
In this scenario, you can usually still get an auto loan, but interest rates can be high, which will increase your monthly payment. If your credit is in great shape, though, you’ll have more choices.
Preferences
If your credit and budget are in good shape, you’ll likely have more room to choose the option based on your preferences. For example, even if you have room in your budget for a lease or new car purchase, you may prefer to keep your monthly payment low with a used car.
Alternatively, if you like the idea of always having the latest models, leasing naturally works best because it allows you to replace your vehicle every two to three years with a new one without the hassle of selling.
Student Loan Refinancing Could Give You Better Options
Refinancing your student loans can have many advantages, including when it comes to buying or leasing a vehicle. When you refinance your loans with a new lender, you may be able to get a lower interest rate than what you have now, which could reduce your monthly payments.
You could also have the opportunity to extend your repayment term on your student loans, which would reduce your payments and free up even more cash flow. Just keep in mind that opting for a longer repayment term will result in higher overall interest charges.
Also, if you refinance federal student loans, you’ll lose certain benefits, such as access to student loan forgiveness programs and income-driven repayment plans. Make sure you consider all the potential benefits and drawbacks before you pull the trigger.
Whatever you do, it’s important to be proactive about student loan debt and do your due diligence when buying or leasing your next vehicle. There’s no one-size-fits-all approach that works for everyone, so you’ll need to carefully consider your options and your situation to find the best fit.
