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Car Buying

Preparing Your Children for Their First Car Loan

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author photo by Russ Heaps September 2013

Getting that first car loan can be really tough. This is particularly true for young people freshly thrust into the cold, hard world of credit. Bottom line: You can't wait until your children need to finance a car to get them qualified for a loan. Well, you can, but you may find your only option at that point is to co-sign. Although a parent co-signing for a child's first auto loan isn't uncommon, it's not the best idea, and should always be a last resort.

What most of us know about finances either someone taught us or we learned by trial and error. Unfortunately, trial and error is often more error than anything else. Credit blunders today can stick with us for years, lowering our credit score and impacting credit worthiness. Everyone should want more for their kids.

In a 2011 survey sponsored by Capital One Financial Corporation, only 22 percent of high school seniors polled claimed they talked to their parents about money management frequently. Nearly 40 percent said they were unsure or unprepared to manage their own banking and personal finances. Furthermore, 44 percent of those seniors planning on taking out student loans for college responded that they either hadn't had a conversation with their parents about how student loans work or had only had a brief conversation about it.

At age 18, most kids think they can run through walls. If 40 percent admitted they were unprepared to manage their own money, the number was probably much higher. It doesn't sound like a lot of kids have much of a foundation for establishing credit or money management, let alone handling the ins and outs of an auto loan.

As parents, there are steps you can take to make your children more financially aware while helping them qualify for that first auto loan.

Create a Budget

Whether your teenager is getting an allowance or working a part-time job, help him or her create a budget. Encourage putting a fixed amount in savings each week. Keeping track of every penny spent can motivate kids to spend more wisely without a parent saying a word. Actions have consequences. Following a budget requires kids -- and their parents, for that matter -- to think about their spending choices. In a world of name-brand clothing and $150 tennis shoes, living within a budget demands discipline best developed at home with a parental safety net. Once the habit is formed to weigh spending choices against a budget, your kid stands a much better chance to keep up with that $250-per-month car payment.

Teach Need Versus Want

Teach your teen how to prioritize purchases. Every dollar spent on this is one less dollar to spend on that. Beyond contributing to savings, money management is all about ensuring funds are available to cover necessities. Teaching your teens to tell the difference between a need and a want -- I want a new iPod; I need a laptop for school -- will condition them to minimize loan balances and make required payments on time. Such conditioning, when the time comes, could also help prevent them from buying more car than they need.

Explain Credit Score/History

Although a credit score is a rather new tool, it has rapidly become one of the most significant bits of information lenders use to determine an applicant's credit worthiness. It reflects the health of a person's credit at any given moment. To build a respectable credit score, your child needs to understand its importance and how it is determined. Your kid also needs to understand that credit scores can also influence other areas, such as insurance premiums and even getting hired.

Obtain a Credit Card

Successfully making on-time monthly payments on a credit card is a sure way to establish the positive credit history needed to qualify for an auto loan. Not that long ago, simply breathing qualified college students for a credit card. This all changed in 2009 with the Credit Card Accountability, Responsibility, and Disclosure (CARD) Act. Today, students, like everyone else, must have verifiable income and demonstrate the capacity to pay on time or secure a co-signer to qualify for a credit card.

But, according to the website The Simple Dollar, there are options. Just remember to always read the fine print and understand the interest rates. Options include the following:

  • "Piggybacking" involves putting your teen on your credit card as an authorized user. It allows you to keep track of his spending while he or she establishes credit. It's like co-signing without as much red tape and some oversight.
  • A "secured" credit card is one requiring a cash deposit of $250 to $500, which is held as security against a card balance up to that amount. Usually requirements for secured cards are much looser than standard credit cards.
  • "Retailer" credit cards are often easier to qualify for and a good tool to establish a credit history, as well.

Ultimately, coaching your kid to become credit savvy while helping him or her build a positive credit history will pay off when it comes time to secure and maintain that first car loan.

This image is a stock photo and is not an exact representation of any vehicle offered for sale. Advertised vehicles of this model may have styling, trim levels, colors and optional equipment that differ from the stock photo.
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