Auto Financing for Teenagers
Teenage drivers often consider an auto loan — financing — as a way of getting the car they want. But it isn’t always the best solution. It might be no solution at all, especially for those under 18 years old. For those 18 or over, there may be a number of financing options.
Be Careful Taking a Dealer’s Advice
Many teens make the mistake of taking dealers’ advice regarding financing and trade-in situations. For example, if the teen has a trade-in and is still paying on a loan, there’s a good chance the loan is “upside down” which means the loan balance is more than the car is worth. A dealer will offer to “help” by “paying off the old loan” and rolling the negative loan balance into a new vehicle loan, instantly creating an even worse upside down situation — a cycle that is often repeated multiple times, making the problem worse at each turn of the cycle.
This is a bad way for a teenager to begin a lifetime of buying cars and managing money. It can easily result in loan defaults, repossessions, and credit problems that will haunt them for years to come.
See our First Car Guide web site for much more information and advice on teenagers, first cars, and automobile financing. The information on this web site is essential to teens buying a car for the first time. It covers a wide range of topics from picking the right car to finding insurance.
Another in our network of web sites, Used Car Advisor, is also an excellent source of advice and tips for teenage car buyers, particularly learning how to avoid common car scams.
Stay Away from Problem Financing
Teens often have limited finances and are desperate to find a way to buy and finance a car.
The most common method for teens under the age of 18 to get a car is to have their parents buy it for them, possibly with an informal family loan arrangement. The car must be in the parents’ name, as must the registration, title, tags, and insurance. When the child becomes 18, the parents can “sell” the car to him/her to change ownership. If financing is involved, the teen could get a conventional car loan from a bank or credit union, although without a credit history, parents would have to co-sign. It’s a great way for young adults to begin building credit for themselves.
For those 18 years old and over, it is common for parents to co-sign for the young buyer on a conventional auto loan, assuming the teen has an income sufficient to repay the loan. Even though a parent co-signs, the car and loan are in the teen’s name. See, Do I Need a Co-Signer?
Avoid Buy-Here-Pay-Here Car Dealers
Unless it’s the only option open to you, try to avoid “buy-here-pay-here” (BHPH) car dealers, who sell older cars, charge high interest rates, and are very intolerant of late or missed payments. Much of their business is selling, repossessing, and reselling the same cars. These types of dealers don’t use banks or finance companies to provide customer loans, as do conventional dealers, and therefore can ignore customer’s credit problems. However, many customers soon realize the disadvantage of buying from such dealers — unreliable and overpriced vehicles, no warranty or return policy, super-high loan interest rate, and strict repayment policy.
Teens and Credit – Bad Credit or No Credit
Many teenage first-time drivers have not had time to establish a credit history, which can cause financing issues. Some do have a credit history, but have had late payments and loan defaults which reflect negatively on their history and creates a low credit score.
“ What you pay for your car loan or lease directly depends on your credit score”
Getting approved for a loan and buying car insurance are based on credit scores, which are determined by consumers’ borrowing history. This information can often be wrong or outdated.
It’s always wise to know your latest credit score before looking for financing.
Don’t let a car dealer surprise you with credit and financial information about you that you don’t already know about yourself.
A poor credit score can result in very high interest rates, high insurance rates, high down payments, and even loan refusals. The recent downturn in the nation’s economy has created tighter credit, making it much more important to have a good credit score than ever before.
Where To Get Financing
Finding a source for loans is always a problem for new teen drivers. CarsDirect Car Loans is a well-respected car loan company that offers loans to people who have limited or poor credit, even no credit. This company’s rates for young drivers are some of the best.
Auto Credit Express and InstantCarLoan.com are other excellent companies to get online car loans, expecially for people with no credit, poor credit, repossessions, or even bankruptcies. They specialize in providing auto financing for people with unusual circumstances. Compare rates and go with the best deal.
Teenagers often get started in car financing by having a family member co-sign for them. This is the best way to get off to a good start and establish a good credit history for future financing.
Teens should realize the importance of not overextending themselves financially and of making payments on time. A single late payment can result in credit score reductions that can take months, even years, to fix. A single repossession or loan default can be damage one’s ability to get loans and other credit for up to seven years.
Calculate Loan Costs
To help decide on a price range for a new or used car, it’s best to use a car loan calculator to experiment with vehicle prices and options that produce an affordable monthly payment. It’s important to understand the relationship of interest rate, loan term, and loan amount to monthly payment amount. Loan finance costs can be a substantial part of the overall cost of buying a car. Novice car buyers are often surprised that the total cost of buying a car is much more than the price of the car itself.
When buying a car, teens should make sure they can not only afford the monthly payments but also the cost of auto insurance (very expensive for teens), gas, maintenance, annual fees, and minor repairs not covered by insurance.
Where to find cars
Although teens car easily find cars online at sites such as Craigslist and eBay, buying cars that you can’t go see, can’t drive, can’t inspect, and can’t talk to the seller face-to-face is not recommended and is an invitation for disappointment and even to be scammed. It’s safer and smarter to buy locally and from an individual or reputable dealer. We recommend using our Car Deal Finder to find cars in your area.