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Between school, extracurricular activities and maybe even a job, it's not uncommon for teens to bounce around from one place to another throughout the day. Those who are tired of walking, taking the bus or being shuttled around town by their parents may be thinking about buying their own set of wheels. The process for doing so isn't that simple, unfortunately.
Generally, you need to be at least 18 years old to obtain an auto loan, and things aren't much easier for minors hoping to pay in cash. Here's what to expect when car shopping with your teen.
How old do you have to be to get an auto loan?
An auto loan is a legally binding contract laying out the financing details of a car purchase. Minors can sign contracts, but they can't be held to the terms of a contract until they reach the "age of majority" – which is 18 years old in almost every state. As such, few lenders are willing to extend a loan to a minor, and the ones that do require a co-signer.
A lender will want to see an established credit history as well, which also presents a roadblock for minors. A minor shouldn't even have a credit report unless they've been added as an authorized user on an account belonging to an adult.
If you're an adult with a teen driver at home, one option is to take out the loan in your own name. Once you satisfy your payment plan, you'll be the vehicle's legal owner and can then transfer the title into your adult child's name when they come of age. Your payment activity is reported to the credit bureaus, which means the loan will show up on your credit report.
Car insurance is another detail to consider. The insurance policy is itself another type of contract, so it presents the same legal hurdle the loan does for minors. One workaround is to add your teen to your own car insurance policy. You can think about taking them off when they turn 18, but they may struggle to find affordable coverage on their own as teens are generally seen as riskier drivers.
A lack of credit history can also pose a problem since auto insurers in many states can consider your credit-based insurance score when deciding your premium. This is why many parents choose to keep their kids on their car insurance until they have more experience driving and are able to cover their own insurance payments.
Is there an age requirement to buy a car with cash?
Things aren't so cut and dried if your teen wants to buy a car in cash. For starters, most states won’t allow someone under the age of 18 to have a car title in their name. There are some exceptions – Texas, for example, does allow minors to title a car. You can check with your state's motor vehicles department to clarify what the law says.
Beyond obtaining the title and registering the vehicle with your state, there's still the issue of your teen being able to legally drive the car on the road, which requires car insurance. As explained above, minors will need an adult's help here.
Additional auto loan requirements
Those planning on financing a car for their teen driver will have to meet certain requirements to be approved. Every lender is different, but you can expect them to look into the following:
|Check your credit report||Auto loan lenders will consider your creditworthiness when evaluating your loan application. Stronger scores, for instance, can suggest you're a responsible borrower who's unlikely to miss a payment. This often translates to better rates and borrowing terms. The opposite is also true – poor credit could jeopardize your ability to qualify for an affordable auto loan.|
|Determine your budget||Even with perfect credit, lenders want reassurance your budget has room for a car payment. A lender is likely to ask you about your income and may verify your employment situation to make sure you have a reliable and steady income. You'll likely need to provide recent pay stubs (or bank statements if you're self-employed) when applying.|
|Shop around for car loans||Be ready to provide your government-issued ID and proof of residence when applying for an auto loan. This is to verify your location should the lender need to contact you regarding a future missed payment.|
How and where to get an auto loan
Auto loans are available through car dealerships, banks, credit unions and even online lenders. Before you fill out an application, consider crossing the following action items off your to-do list. Doing so can help streamline the process and help you save money:
|Check your credit report||Again, your credit can make a big difference when it comes to getting approved. It can also impact your interest rate and loan terms, which affect how much you ultimately pay over the life of the loan. If possible, it's wise to check your credit several months before making a purchase so you know where your scores stand. You'll also want to review your credit report to make sure there aren't any major red flags that could tank your loan application. That said, there are steps you can take to get a car loan with bad credit.|
|Determine your budget||Before test driving your teen's new car, figure out how much you can reasonably afford. Will you be paying for it yourself, or will your child be contributing in some way? Either way, coming to the table with a down payment of at least 10% is typically required when seeking an auto loan.|
|Shop around for car loans||Comparing quotes from different lenders can pay off in the long run. If you're worried about the impact submitting multiple credit applications can have on your credit scores, doing so within a short time frame can help minimize the impact.|
If you end up going with a bank or credit union for your auto loan, getting preapproved can help give you some leverage when negotiating with car dealers. You may also be able to finance your teen's new car directly through a car dealership. Either way, comparing offers can save you money over the long term.
The bottom line
Buying a car can prove be tricky for minors. Between financing and insurance, an adult will have to step in at some point if a minor is hoping to purchase a new vehicle they can legally drive. That said, planning ahead and understanding your budget can help you protect your own financial health along the way. You can avoid unwelcome surprises by monitoring your credit for free with Experian. It's a simple move that can help you keep your credit score going strong.