How Car Loans for Teens Work

For many teenagers, getting a driver’s license is a rite of passage. And as a parent, life can be much easier when your kids can drive themselves to school, work, or sports practice.

If you’re a young adult whose thinking about buying a car, or a parent whose investing in a car for your child, it’s important to understand how auto loans for teens work.

Car loans for teens and young adults are tricky and work differently than car loans for adults. We’ll explain some of the most important aspects of auto loans for young car buyers, including how much you can expect to spend.

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The Costs of a Car Loan for Teens

The biggest consideration when getting an auto loan for a teen is the cost. You might need to borrow a substantial amount of money to cover the total cost of the car, and you’ll still need money in your budget to cover additional costs beyond your loan payment.

Car Insurance

The monthly car insurance payment on a car driven by a young and inexperienced driver is typically high because they’re much more likely to get into an accident. The cost of insurance for young drivers runs about $2,000 a year, but the true cost depends on personal factors, like age, driving record, location, and the insurance company.

Gas

Gas prices are in constant flux and vary widely based on where you live. On average, however, you’ll need about $1,600 to cover the cost of gas for a year, based on typical driving habits. Before you buy a car, you should more closely estimate how much you’ll drive to determine how much you should allocate in your budget for gas.

Maintenance

Proper maintenance is essential for keeping a car in good shape, and it averages about $1,400 per year. This figure includes regular oil changes, tire rotations, air filter replacements, and more.

License and Registration Fees

When you buy a car fees include the costs of getting a license, registering the vehicle, and paying taxes on it. These costs typically run just under $900 per year.

Craft a Budget

With the associated expenses in mind, the next step is creating a budget. Consider the total income the teen gets every month, and subtract all the aforementioned costs plus any housing costs or other living expenses the teen must cover. What’s left is the maximum amount the teen can put toward a monthly payment on a car. Ideally, though, you want to leave some wiggle room for expenses.

A teenager or full-time college student often has difficulty getting a car with all those limitations, so it might be easier if parents can offer financing assistance. Whether that means splitting the monthly payment or having the parent cover insurance or other expenses, sharing the costs makes it much easier for a full-time student or teen to maintain their vehicle without debt consuming their life.

Start Building Credit

A teenager is unlikely to have a comprehensive credit history, which can impede their ability to get a suitable car loan. Many lenders simply won’t offer auto loans to people who don’t meet credit qualifications, such as those who lack good credit and or have no credit history.

Before trying to get an auto loan, a teen might want to build up their credit by getting a credit card, making a few purchases, and paying off the balance each month. Getting approved for a credit card is much easier than getting a car loan, and it’s best to build credit a at least a year before beginning the car-buying process.

Check Your Credit History

All reputable lenders, including banks or credit unions designated as equal housing lenders, are going to check your credit. To avoid any surprises, make sure you check your own credit score before trying to get an auto loan.

Then, you can research how your credit qualifications affect the car loan amount you can finance. If you have good credit, you can likely borrow more than if you have fair or bad credit.

Benefits of Co-signing

Financing options can be disappointing without a credit history, and many teens must deal with this scenario. Fortunately, a teen doesn’t have to finance a car loan alone. They can co-sign an auto loan with their parents.

When a teen co-signs on an auto loan with a parent, the loan itself is still in the teen’s name along with the car. The lender has the assurance the teen is not solely responsible for paying off the loan, as the parent’s income and credit history play a role as well. This can help secure a lower interest rate and allow the teen to borrow more money.

It’s important the teen understands that co-signing a loan puts both parties at risk if they don’t make the monthly payments on time. While the loan and the car are in the teen’s name, both parties’ credit scores will be negatively affected by missed loan payments.

Watch for Buy-Here-Pay-Here Dealers

An alternative to a traditional loan from a bank or credit union is to finance through a buy-here-pay-here car dealer. These third-party advertisers don’t care about credit scores, so they can be appealing to teens without credit or with bad credit. That’s about the only advantage, though, especially if you’re looking to save with a lower annual percentage rate or flexible terms.

This type of dealer typically has higher interest rates on loans than banks, and their vehicles might be below average or overpriced. Additionally, the repayment policies are strict, and they offer little leeway on missed payments.

Finance & Insurance Editor

Elizabeth Rivelli is a freelance writer with more than three years of experience covering personal finance and insurance. She has extensive knowledge of various insurance lines, including car insurance and property insurance. Her byline has appeared in dozens of online finance publications, like The Balance, Investopedia, Reviews.com, Forbes, and Bankrate.