[The following is a guest from Amber Satka. She writes on financial topics, and much of her research can be found at her app site: www.carloancalculator.org. Amber is a former office manager and current mother and writer.]
The day you have dreaded has come: Your teenager is ready to drive. Not only that, but he wants you to buy his car. I mean, it's his first car! Aren't you, like, morally obligated or something to buy him his first car? How is he supposed to afford to buy it himself? Don't you want him to focus on his school work instead of worrying about how to come up with the money to buy a car? Geesh.
Maybe you've gotten past that
fight discussion and come to the conclusion that your teenager will, in fact, be buying his own car if he wants to drive any car at all and now the issue has turned to how much you are going to help him buy the car -- if any. Will you give him a little cash to help with a down payment? Offer a match? Or will you agree to co-sign on a lease or loan for him?
While you might be inclined to dismiss the possibility o becoming a co-signor, it's worth a second look. In addition to the many cons you may have already thought of, there are also a lot of pros. Here are a few things you should consider when trying to decide if you should co-sign on a car loan for your teenager:
Pro: It Provides a Safety Net
This may be a pro for your teenager and not so much for you: When you co-sign for a loan, you offer a safety net in case he isn't able to pay the bill for some reason. If he defaults, the bank is going to look to you to pay up. That means you can help save your teenager from himself (which is really what the job description of any parent should actually say: "Here to save you from yourself") and can help to protect his credit and ensure that he doesn't lose his very first car.
You can also use the opportunity to try to teach him about financial responsibility and the consequences that he can face if he doesn't meet his obligations. (We say "try" since you will likely be having this conversation over rolled eyes and shoulder shrugs.)
Pro: Allows Them to Get a Safer Car
Let's face it: When your teenager only has about $1,000 to spend on a car, he's looking at options like an old Jeep without a cover or a broken-down Chevy that requires special voodoo to start and a system of hand maneuvers and pullies to stop. Most teenagers aren't going to be able to afford a new car or even a certified used car that is up-to-date, in good repair, and packaged with safety features -- that is, unless, they can get financing, and they are unlikely to get financing without you co-signing.
If you want to sleep easier at night (an elusive quest for parents of teenagers), you should co-sign on the car so you can at least know that the car your teen is driving won't be won't causes him to get into an accident -- it will be the game of chicken or the off-road racing.
Pro: Protects Them from Financial Issues
There are a lot of shady dealerships that would be all too happy to take your teen's money and sign him up for financing -- which is also likely to come with outrageously high interest rates and other cut-throat terms. Or you can leave him to his own devices in the Wild, Wild West that is the secondary market. He can just hand over his money to someone who "seems like a really good guy" who promises that the car was only driven on Sundays, only to find out that the car is never going to run without a hope and a prayer (even with a good mechanic).
Offering to co-sign on a loan will allow your teen to shop at a reputable dealer and avoid being taken in by these scams, which could end up causing long-term financial issues. And who do you think he's going to call when he finds himself in trouble anyway? Better to take a proactive stance.
Con: They Might Default
Obviously, the biggest drawback to co-signing on a loan is that you might actually get stuck with the bill -- and if you refuse, it's your credit that will go down the toilet with his. There's no way to get around this reality. You can try to minimize your risk by having a discussion about the serious nature of the responsibility of taking on a car loan (see eye rolling above) or by asking your teen to enter into a "contract" with you about paying for the loan (though, if the contract with the dealership isn't enough, we're not sure a contract with you will be any different).
The bottom line is that you take a chance. Either way, it's a good opportunity to teach your teen something about financial responsibility. Worst-case scenario: You've got yourself a nice new car if he defaults.
Con: They Might Push to Get a Car They Can't Afford
On any dealership lot, there are cars that range from your basic box car with an analog radio and roll-down windows (which is going to be your jam when you're shopping for a teenager's first car) to top-of-the-line, suped-up luxury cars (which your teenager is definitely going to gravitate towards). When the car is being financed, your teen may not have a tangible concept of how much money is actually being spent, so he may push to get a car he can't actually afford -- of course, thinking that you'll make up the difference when he can't. Lay down some boundaries and a strict budget before you go shopping.
Con: You'll Have to Pay for More Insurance
Most parents opt to put their teens on their insurance policy to give everyone a discount (since you'll get a multi-car discount, and that will bring down the sky-high rates that your teen is charged). However, if your teen is financing a car, you'll have to pay more for insurance as you'll have to have full coverage. You'll also likely want to get GAP coverage to pay the difference between the payout value of the car and the amount you still owe on the loan so you don't get stuck with a bill if your teen is in an accident.
Ultimately -- as with all things concerning your teenager -- there's not going to be an easy answer. But it's worth considering these pros and cons to make sure you know what you're going to be up against and then making the best decision you can. Co-signing on a car loan will definitely make you your teen's hero, but forcing him to buy a beater from someone you help him screen on Craigslist will also help him learn the value of working and waiting for nice things. You decide what's in his (and your) best interests.
Did you agree to co-sign on a loan for your teen's first car? Tell us why or why not in the comments!
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