Lazy Man and Money

Should You Co-Sign on a Car Loan for Your Teenager?

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[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!

Committing to a Credit Card? Don’t Underestimate Annual Fees

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This guest post on credit cards was written by Jason Bushey. Jason is a full-time personal finance blogger and the Editor of Creditnet.com, an online authority on credit cards and credit repair advice.

A lot of people don’t realize that when they apply for a credit card, they’re making a pretty serious financial commitment.

‘Why so serious,’ you ask? Because it’s generally a bad idea to close a credit card account since it lowers your overall credit line and halts the payments history associated with that card – both of which can have a marginal negative impact on your credit score over time.

I’m in my mid-20’s, and I’ve had my first credit card for nearly seven years; do you know how many girlfriends, apartments and jobs I’ve ripped through in that amount of time? Had I known that I was making what amounts to a semi-permanent commitment when I applied for that card (which has NO rewards and a steep ongoing APR), odds are I would’ve shopped around a little (or at all) before signing up for that first card.

That said, there’s one thing I’m fortunate my first credit card does not have: an annual fee. In fact, this is the sole reason I’ve left this old credit card open all these years, and it’s really the only thing it has going for it.

No annual fee credit cards are best for a long-term credit card commitment because they’re low maintenance and essentially free to carry in your wallet. Once I paid off the balance on that first card, I just sort of set it aside and forgot it existed completely.

Granted, I’m leaving myself open to account closure based on inactivity (ideally I would make at least one purchase a month and pay it back on time), but the balance attached to the card still shows up on my credit report. Having a high credit limit lowers one’s credit-utilization-ratio – which is essentially your available credit line (or all of your credit) in relation to the amount of credit you owe – and thus improves your credit score over time.

Long story short: it’s best to keep that available credit line high for as long as you can. That’s the basic reasoning behind keeping credit card accounts open, and since it’s better to keep them open for free rather than pay a fee each year, credit cards that don’t require annual fees are recommended in the long run.

Another reason you should hesitate from closing credit card accounts is your credit history. Again, the longer you leave an account open, the more significance it takes on in the eyes of creditors. It’s like a relationship; your friends and family obviously take the partner you’ve been with for a longer term more seriously than a new fling. Showing a strong and positive commitment to a credit account over time goes a long way toward building your score.

OK, so are no annual fee credit cards always better to carry? Well, yes and no…

It used to be that cards that required an annual fee offered more rewards, cash back and points than the competition that didn’t require these fees; American Express used to be the go-to example. Over the last several years however, the gap in quality between the two categories of cards has become less and less obvious. Today, there are some excellent cash back options available that require no annual fees for the duration of your cardmembership; so long as you’re paying off your bill in full each month, these cards are essentially free to own.

That said, there’s one category of cards – airline credit cards – that usually require an annual fee but offer some sweet perks you won’t find on freebie cards. Airline miles, boarding privileges and companion tickets with your favorite airline all generally require an ongoing annual fee. However, you might find that the money saved with such a card far outweighs the annual fee you’re paying each year, and suddenly that annual fee doesn’t look like such a bad deal.

When it comes down to it, it’s really up to the quality of the card and how you plan on using it to determine whether or not an annual fee is worth paying. But it’s important to remember that credit cards aren’t meant to be applied for on impulse (and yes, this includes retail credit cards) – they’re actually a pretty serious financial commitment, especially if you value your long-term credit score (which of course you should).

So think twice about bonus miles and intro offers in the mail and consider the long-term benefit of a credit card BEFORE you apply for it, not after. Your credit score – and your wallet – will be better for it in the long run.