How to Explain Auto Financing to Teens

Credit and Debit, Financial Responsibility, Planning & Money Management | Wednesday, August 10th, 2016

Your teenager is probably chomping at the bit to own a car. While you are okay with the idea of your teen driver having his or her own set of wheels, you will not simply hand your child the keys — you want them to earn it by at least partially paying for the car.

In order to ensure your enthusiastic driver purchases the best vehicle for their budget and understands how loans work, it’s important to discuss the process of auto financing. Check out the following tips to make this process as seamless as possible:

Car Loans 101

Even if you plan on paying for the vehicle outright and have your teen reimburse you for part or all of it, it’s still important they learn about the basics of loans. As DMV notes, sit down with your teen and explain the importance of credit or FICO scores and why people with higher scores receive better auto loans.

In addition, make sure to hit on debt-to-income ratios by using real-life examples to explain why a lower ratio typically results in a better interest rate and monthly loan payment. Stress the importance of a down payment and how a seemingly small amount, like $500 or $1,000, will have a tangible impact on payments and loan terms.

The Pluses of Pre-Owned

Although your teen might be dreaming of a brand new, red convertible sports car, you and your wallet probably have other ideas. As notes, buying a used vehicle is much more reasonable and affordable for teens than a new car. Even if your teen insists on paying for it, talk about how a well-maintained car with low miles is a much smarter purchase than a new one that will immediately depreciate by thousands when driven off the lot. lists three great places to shop for a pre-owned vehicle: a regular dealership, dealerships that specialize in used cars, or a private party sale. Review these options with your teen before heading out to shop for a car.

Discuss Financing Sources

It might amaze your teen to learn there are a variety of ways to finance a vehicle, as well as definite pros and cons about each one. As How Stuff Works notes, many people arrange for vehicle loans through the dealership, which is definitely a quick and convenient way to secure financing. However, these loans are not typically competitive and the salesperson might use high-pressure tactics to encourage extra add-ons to the vehicle.

Meantime, a bank or credit union will typically offer better rates and personal service — and you and your teen will not have to endure a big sales pitch. Still, know that banks are not always open on the weekends or during the evening when you might be buying a car. Online financial institutions are also available to help with car loans. While they are also quick and easy and often offer great loan rates, caution your teen against using a service in which they are unfamiliar and doesn’t have a brick and mortar location.

A personal loan can also be a good way to finance a car, either from you, a close relative or family friend. While you might not charge interest to your teen, which means a nice low monthly payment, personal loans not paid off in a timely manner can jeopardize any relationship. More importantly, it will not give your teen the opportunity to boost their credit score.

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