Your student loans could be why you’ve been turned down for a car loan…but not for the reasons you’d expect.
If you’ve attended college at any point during the past 20 years, chances are you’ve got some student loan debt. According to the popular website Student Loan Hero, 43 million college graduates are carrying some form of student loan debt. The average college grad is about $37,000 in debt by the time they leave school.
When it comes to car loans, however, it may not be the student loan balance that stands between you and a car loan. It could very well be the student loan payment itself. An inaccurately reported student loan payment could wrongfully land your car loan application in the digital “no” pile (while this applies to all forms of debt, I’m just sticking with auto loans for now).
Right loan, wrong payment
Suppose you’re enrolled in an Income Driven Repayment plan. These programs were instituted so student loan borrowers could make their payments and avoid living in a box at the same time.
In this case, not all federal student loan servicing companies report the IDR amount to the credit reporting agencies. What shows up instead on your credit report instead could be the standard payment amount which is typically much higher.
In other words, instead of your credit report reflecting your $20.00 per month loan payment under an IDR plan, it may show a much higher monthly payment amount calculated under the Standard Repayment plan.
What this means for you as a prospective car owner is this: any time you apply for a car loan, the lender (bank, credit union, automotive finance company) calculates your debt-to- income ratio, or the percentage of your income that is applied toward monthly debt payment.
If this debt percentage falls outside of the lender’s guidelines, your application is either torpedoed altogether, or you could end up getting reamed by an interest rate that’s needlessly high. Both scenarios may be avoidable with some persistence on your part.
Don’t panic. Take action.
If your auto loan application was declined, the lender will issue you an email notice (for online applications) first, followed by a written explanation via snail mail. If your notice indicates “excessive debt load” or similar phrasing, there’s your tip-off.
- Contact the lender and request a secondary review. Ask which figure was used to calculate your student loan payment. If they used the standard payment as shown on your credit report, offer to send them copies of your Income Driven Repayment plan paperwork showing the correct payment amount.
- The updated information may or may not save your bacon in terms of finally gaining loan approval or a better rate, but if an inaccurate student loan payment amount was all that stood between you and loan approval, you could be in luck.
Taking out an auto loan, especially for the first time, is a big step. If your loan is declined for excessive debt load, it could be an inaccurately reported student loan payment amount. Don’t let that stand between you and a new or new-to-you ride.