When a teenage child reaches the legal driving age, it’s not uncommon for parents to consider financing a vehicle for them. It comes with many benefits, such as ensuring they have a safe and reliable car and teaching them financial responsibility, among many others.
If your teenage driver has yet to establish a satisfactory credit score required to finance a vehicle, the best option would be to finance it for them or add yourself as a co-signer.
For the wondering parent, there are a few ways you can go about financing a vehicle for your child, and the best option is entirely dependent on your personal situation. You probably have many questions at this point, from where your child’s financial responsibility stands when you finance the loan to what risk you take when signing your name to someone else’s vehicle.
For the purpose of answering your very legitimate questions, we’ve created a comprehensive guide to help you make a more informed decision.
What are the different ways of financing a car for my child?
Since teens are often limited with their finances and have yet to establish a credit score, they are left to find alternative ways to finance a vehicle. Buying a car outright is always an option but having access to a large sum of cash is not a reality for most teens. In this case, having a parent or two to step in and help is the next most reasonable option.
1. Financing the Car for Your Child
The most common method for teens under the age of 18 who don’t have a credit score or a reliable source of income would be to have their parents finance the loan. The loan is often done directly through the car dealership, where it is funded by their affiliate bank.
If you’re not comfortable going through the dealership to finance the loan, you can shop around at other financial institutions. Whichever method you choose to finance the vehicle, it’s always recommended to research your financing options before making a decision.
Like any other loan, the financing rate you are offered will be based on your active credit score, income, and employment. Keep in mind that all banks have their own criteria for how they determine the rate. Therefore, shopping around will be the best way to secure the lowest possible APR.
If your child will be responsible for making the monthly payments, securing a low rate is essential to keeping their payment amounts affordable. A few lenders to consider are LendingTree, CarsDirect, any central bank (including the one you deal with), community banks, and credit unions.
2. Co-Signing a Loan for Your Child
Once your child reaches the age of majority, which is 18 years old in most states, most lenders are willing to extend a car loan. However, this comes with a caveat.
If they have not yet established an active credit score or have consistent income from employment, they will likely be turned down as these are the primary criterion.
In this case, co-signing your child’s car loan can increase their chances of being approved. Keep in mind, however, that co-signing for a loan makes you fully liable for all the payments. This means that if your child defaults on any payments, you are on the hook to get them cleared up.
In addition, when payments are missed on the loan you co-signed, your credit score will be impacted as it would your own loan. This is something to keep in mind.
The benefit of co-signing your child’s car loan versus financing it yourself is that it helps your child establish a credit score. Once the loan is paid off and assuming no payments were missed or paid late, your child should no longer need your help for future loans as they will have an established score.
Whose name will the car be under if I finance a car for my child?
When a parent finances a vehicle for their child, the vehicle will need to be in the parent’s name.
This also extends to the insurance and licensing agreement, meaning whoever took out the loan is the one who will be under all three titles.
Essentially, the car will legally belong to the parent. You will need to develop a private agreement with your child to ensure they send you monthly payments for the loan.
In contrast, the vehicle, insurance, and licensing agreement will be in the child’s name when a parent only co-signs for a loan the child took out. In this situation, the car legally belongs to the child, and the parent agrees to take responsibility for repaying the loan if it goes into default status.
How should I go about this if I want to buy a car as a gift for my child?
If you’re paying cash for the vehicle, you can put the vehicle in your child’s name.
However, when you gift your child a vehicle that will be financed, nothing changes, and the same financing rules apply.
For example, when you’re taking out a car loan in your name, you will be fully responsible for all the payments, and it will be your name under the title, whether it’s a gift or not.
If you prefer your child to be under the title since it’s a gift, you can let them know ahead of time what your gift plans are. You would need to go to the bank or dealership together and co-sign for them.
If you will be responsible for the payments, you can authorize payments to be debited from your personal bank account. But again, in this case, the vehicle will be under your child’s name.
Is financing a car for my child a good idea?
There are pros and cons to financing a vehicle for your child, but knowing if it’s a good idea will depend on how financially responsible your child is.
The benefit, of course, is helping them get access to their first vehicle while teaching them financial responsibility. An advantage to you is that doing this can increase your credit score, assuming the payments are consistently made on time without fail.
When it comes to trusting someone else to make payments on time, you are always putting yourself at a certain level of risk since you have limited control over it. Suppose your child loses their job or becomes negligent with their money, thus skipping payments; you are 100% responsible for covering them. If not, your credit score will be negatively impacted, and you will incur substantial interest and late payment fees. These are things everyone wants to avoid.
Does financing a car for my child build his/her credit?
If the vehicle finance is in your name, your child’s credit will not be impacted. However, if you co-sign your child’s loan, your child will have an open and active term loan reported to the credit bureau.
In this case, co-signing will help them build their credit since the loan is under their name. If you’re looking to help them establish a credit score, co-signing is the way to go.
Financing a loan for anyone is always a difficult decision to make. When it comes to financing a car loan for your child, the best way to go about it is to have a long talk with them about financial responsibility.
Teenagers are often unaware of the long-term implications of neglecting their loan payments and racking up debt, so educating them will benefit you and your child.
Whether you decide to take out the loan in your name or co-sign for them, always consider the benefits and drawbacks before finalizing your decision.