Spotlight Feature: Payment plans that make buying a car easier as a recent grad student

No time is better for a student than the outlook of graduation. So if you recently graduated (like me) or are graduating soon, conGRADulations! You made it! All those long nights, questionable assignment grades (especially when you thought you deserved more than the grade you got), and even those dreaded group work assignments, you survived. 

Now is the time that you venture off into the real world, whether it be looking for a job, starting your own business, or simply turning over another milestone in your life.

How Much Car Can You Really Afford?

Before venturing out and making a big purchase, evaluate your ability to do so. Speak to your family, a trusted friend, or even the bank to see if this decision really is feasible. The last thing you will want is to be paying off student loan debts AND make a high monthly payment on a car. Car affordability calculators are a great tool to help along with this process to but they are again just a starting point. 

When buying a car remember the 20/4/10 rule: 

• Down payment: When making the down payment on your car, you should put down about 20% of the cars value  
• Loan term: The loan term should be no longer than 4 years, otherwise you will be paying too much 
• Payment to income ratio: Car payments should be no more than 10% of your monthly income
  • This simple rule can help you avoid paying hundreds or thousands more in interest on your depreciating car 

College Graduate Discounts

Many car companies offer college graduate discounts – a bigger perk for college students in terms of more than just receiving a degree. They range anywhere between $500 to $1000 maybe more depending on the company. Below is a list of manufacturers that offer discounts for recent college graduates: 

• Acura 
• Audi 
• BMW 
• General Motors 
  • Chevrolet, GMC, Buick 
• Stellantis 
  • Chrysler, Dodge, Jeep, Ram 
• Ford 
• Honda 
• Hyundai 
• Lexus 
• Lincoln 
• Mercedes-Benz 
• Mini
• Nissan 
• Subaru 
• Toyota 
• Volkswagen 

The program typically applies to those who graduated college within the last two years and are for specific car models. Keep in mind too that some financing companies also require good credit and allow students to defer payments for up to 90 days in some cases. 

Car Financing Options for Graduates

There are three financing options for graduates: take a loan, lease the vehicle, or pay in cash. The pros and cons will be weighed for each. 

Loans: Generally speaking you should try to keep your loan-term at 48 months (or 4 years). However a longer term, say 5 years, keeps your monthly payments low. Maintaining your budget from this simple rule will help you avoid falling behind on your payments. 

Pros: 

• Put money in cash reserves 
  • You’ll save the money for what you might really need at the time, such as for rental agreements or furniture 
• Gets you a reliable car
  • This is a big plus – it will help you be mobile to find a job and get you to places you need to go 
  • A new vehicle = not dealing with car breakdowns or costly repairs 
• Better gas mileage 

Cons: 

• Drag on your budget 
  • If you’re coming out of college with debt, it’s one more pile of debt to pay off 
  • If the down payment isn’t big enough, it could mean that your car payments may get neglected (meaning you owe more than it’s worth)  
• Depreciation 
  • Cars depreciate about 20% or more in the first year of ownership 
  • That figure rises to around 60% after you own the vehicle for 5 years 
• Higher interest payment 
  • If your credit isn’t good, you’ll end up paying more in interest for the life of the car loan 
  • If you have no credit, ask the dealership about financing options 
    • Often, dealers will take a chance on recent college graduates and offer to finance vehicles 
    • However, a 0% financing deal on a car may not be available to you, so be prepared for a higher interest loan 

Lease: By definition, leasing is the process by which an individual uses a vehicle for a predetermined period of time in exchange for timely payment for rentals. The vehicle is not owned by the user and so once the period is over, the car is returned back to the lessor (owner of the asset). 

Pros: 

• Drive a new or certified pre-owned car 
  • Offers nice perks – most notably, the ability to drive a reliable new or previously owned car backed by a warranty and a reasonable monthly payment, often with basic maintenance covered 
• Lower down payment 
  • Leased vehicles generally require a smaller down payment of up to $2,500 on average 
• Lower car payment 
  • Leasing a car with lower monthly installments can be a more affordable way to go 

Cons: 

• Limited annual mileage 
  • There are constraints on how many miles you can put on the car per year, which places limitations on how far you can drive it, and you’ll be charged more if you go over those miles 
    • Important to keep in mind as you travel to work 5 days a week – your first job might be a little farther than expected, so be mindful when choosing the number of miles you will be driving annually 
• No car at the end of the lease 
  • When the lease is up, the car has to be returned and if you don’t decide to buy it, you just made many payments with nothing to show for it
  • The dealer might turn it around and sell it 
• Expensive way to get around 
  • Leasing can be a costly way to get around and basically with a lease what you are doing is paying for the depreciation of the car plus a profit for the manufacturer you’re leasing from without actually owning rights to the vehicle 
  • Technically this isn’t a loan (meaning there is no interest), but there is still what’s called ‘cost of capital’ that gets factored into the monthly lease payment 
  • Great deal for car manufacturer, not so great for you 

Cash: Let me just say, if you are able to pay for your vehicle in all cash (and solely yours) as a student you are winning at life. 

Pros: 

• Credit score is not a factor 
  • If you’re credit isn’t as great as you would want it to be, buying a car with cash doesn’t require a credit score at all 
• Grow your wealth 
  •  Even if you’ve graduated with no debt (once again, consider yourself lucky), owning a car with no payments makes it easier to save money for life’s other necessities that require an income to obtain 
• No payments (plans) or interest 
  • This is the best and ideal way to purchase a car, no matter what stage in life you’re in 
  • The title to your car instantly becomes yours so no worries over interest payments or monthly payments for your car 

Cons: 

• Lack of newer safety features 
  • You may not get the safety features you are looking for if you’re buying a less expensive new or used vehicle, including adaptive cruise control and lane-keeping assist 
• Not building credit 
  • Building credit doesn’t happen when you pay cash for big purchases so you are left looking for other ways to achieve this (although this might not be a problem for all) 
• Loss of cash reserves 
  • If you had to reach your hand into the rainy day fund, chances are you have no more money for ‘emergencies’ and if you don’t have a job lined up or steady income coming in, this will pose as an issue later on 

Each of these options come with a financial burden in some way or another, you just have to evaluate the pros and cons of each and make your decision based on that. 

Don’t Forget About Car Insurance!

The last thing that you would want to have happen is get caught in an accident and have to pay for everything out of pocket. Surely your money will be gone in an instant, and then you will be back to the drawing board in finding a car. This time though, no money to purchase one. 

It can be helpful to get several quotes first to see which one works better for you. To assist a little with this process, autotrader has published a list with great used car options for under $5,000 and some of them are more modern than you may think. 

Saving money, especially an amount like $5,000 can be a relief and big weight off your shoulders as a graduate student. The world is yours, go conquer it! Where will your first car adventure take you? 

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