Car Loan VS Student Loan

[EllenFrasier]

Which is better to take out? My son got his driver's license and wants to buy a car. He's got about $5,000 saved. So far, he has no outstanding debt as he's been able to pay for college with the salary from his job. If he spends all the money he has saved on a car, he will need to take out a student loan -or- he could borrow money for the car. Which would be better?
Sense we started out with my husband's student loan and my car loan and went right into mortgage payments and more car loans, I'm not sure which is the best way to go from the beginning.

 

[Hannathy]

I would think he would be able to get a lower interest rate on a student loan than a car and he could pay it off longer. Most student loans at least thru the government you don't even have to start paying them until you graduate. So he could use his earnings to keep paying for school instead of to the car loan.

I would have him talk to financial aid at his school.

 

[StitchesGr8Fan]

Don't do student loans! They are awful! He will be paying them forever. And the rates just went up.

 

[BubMunkeyBles]

I'd see which he can get a better interest rate on... some of my student loans have higher rates than our car. It's disgusting.

 

[danceintherain]

It depends on the interest rate and terms for both loans.

I suggest sitting down and comparing the repayment of both and figuring out which would have him paying more in the long run.

Whichever one will allow him to get out of debt faster and pay less interest is the one he should choose.

 

[MrsPete]

I'd try very hard to choose neither. Before I'd take out a loan for either of these things, I'd consider all my options:

- Could he buy the car now . . . then knock himself out this summer working two jobs; thus allowing him to pay his tuition by the time school rolls around? Being exhausted now beats dealing with the stress of debt and the reality of compound interest working against you.

- How is he getting to school and work now? Is that method no longer acceptable?

I don't know what possibilities might exist for your family, but I'd beat the bushes for ideas before I'd accept that he'll graduate with debt. He may end up needing the loan anyway, but I'd try to avoid it, if at all possible.

 

[2Monkeys]

I would choose the student loan (though no debt is better) because of this (from IRS website):

The student loan interest deduction is taken as an adjustment to income. This means you can claim this deduction even if you do not itemize deductions on Form 1040's Schedule A.

You can pay additional principal so that the loan won't 'take forever' to pay off.

 

[Lisa_M]

I'd suggest taking out the car loan over the student loan. Shorter term on pay-off, probably a lower interest rate and if he couldn't afford it down the road, he could sell the car. The general rule of thumb for student loans is it costs about 3x the initial amount. So is that $5k really worth paying $15k for over a decade or longer?

 

[branv]

IMHO, no contest: take the student loan. A Stafford loan, not a personal loan. If he takes out the student loan now, he will not have to pay on it until 6 months after he stops attending school at least part-time. That means any extra money he makes working from now until graduation can be saved up to pay on that loan. If he is eligible for a subsidized loan, he won't even have to pay any interest on the loan while he's still in school. If he is eligible for only an unsubsidized loan, it will accrue interest while he's in school, but he can make it less painful by paying that interest amount while he's in school and still save money towards paying off his loan principle.

As a PP stated, any interest he pays on that loan is also tax deductible. And make sure he claims his school expenses on his taxes, as it really helps (DH's tuition always helped us get quite a nice chunk back on our taxes).

While car loans are very seldom flexible if something happens, a stafford loan can be deferred if you go back to school, sometimes for a short time if you have a financial hardship, and they will often work with you to arrange easier payments (graduated payment, income sensitive, etc). You really won't get that with a car loan.

One caveat, however: student loan people WILL garnish your wages if you don't pay, and I'm fairly certain they aren't eligible for adjustment in bankruptcy.

I am VERY grateful for the student loans DH and I were able to take out, as we would not have been able to go back to school without them. The loan people at our individual schools and our lenders have been nothing but wonderful and very helpful. But, as with any financial thing, the first step is to be an informed borrower. Way too many students take out loans without the first clue what it means and what is expected of them. Overall, knowing what I know, I would go with the student loan.

Hope that helps!

 

[Sagginit]

student loan.

interest is tax deductible, if it is a small amount you can often qualify for a stafford or low interest rate loan. as stated he would have some extra time to start payments if needed.

if the car is less than $5000 he may have a hard time finding a loan. i just did that and tried to loan shop. i found most banks would not give me a loan for less than $5000 combined with the year of the car i was buying. the rate i did end up getting was almost 2% higher than the advertised rate b/c the amount was low and the car was a bit older so the rate went up.

ps i just paid off that car loan in less than 6 months. i chose to get rid of that instead of putting the extra money towards my student loans b/c as stated the interest is not tax deductible. i also had some communication issues with the bank and got fed up, never had that happen with my student loans.

 

[2Monkeys]

If he is only borrowing $5k for a student loan, he should pay it off just like a car loan. Meaning don't pay the minimum payment the loan requires, make higher payments so it will be paid off just as a car loan would be. He will still get the interest deduction on his taxes, but will not have the loan hanging around for years longer than a car loan.

 

[Pembo]

My car loan is 1.9%, my student loans are 6.8%....check the interest rates.

I would suggest not getting the student loan if he doesn't have to.

 

[Pooh2]

My son's Stafford loan is 6%, his car loan is 1.9 %. Seems a bit backwards..

 

[girli565]

My car loan is at 2.4% and my student loan is at 4.75% (I graduated in 2006 and locked in a low rate), I'd take a car loan and make payments if it has a lower rate.

 

[sweetdana]

If he is smart enough to make extra payments go with a student loan. The payment will be substantial less than a car loan, as the term is longer. If he will not make extra payments go with the car loan.

 

[TifffanyD]

I'd take the car loan. Student loans are not dischargable in bankruptcy... and they last forever.

 

[DisneyEater]

I'd take the car loan. Student loans are not dischargable in bankruptcy... and they last forever.

This.

 

[patsal]

A car loan through a credit union, student loans are insanely expensive and they want them to drag on for life. DS has a student loan I co-signed for, at $50 per month with $35 of that in interest...I have been matching and doubling the payments he makes, so it is going down quicker, but the student loans DH and I had are nothing compared to what they are doing to kids today.

 

[ilovemk76]

I would take out the car loan.

 

[leanneintexas]

If it's a stafford loan and it is subsidized then definitely the student loan. Subsidized stafford loans the interest is paid by the federal government while in school. If he makes payments on them while in school and pays them off then it will be 0% interest to him.

Sometimes older cars are harder to finance and come with higher interest rate. If the student loan is unsubsidized you should compare the interest rates between the two and go with the one with the lowest rate.