If you have a teen driver in your home, you may be facing a time when they’ll want to buy their own car. This major life milestone can give teenagers a sense of freedom and independence, but it also brings important lessons in responsibility.
You can play a key role in helping your teen buy their first car by guiding them through the process of creating a budget, comparison shopping, prioritizing safety, and more. Below, we'll discuss key details about how you can help your teen through this complicated process, what factors you need to consider, and what options you and your teen have for paying for the car.
- Creating a budget is one of the first lessons a teen should learn before they buy their first car.
- Help your teen understand the costs of owning a car beyond the sales price such as insurance, gas, maintenance, and repairs.
- Teach teens how to research financing options before they make a purchase.
- Encourage your teen to compare the pros and cons of buying a used car versus a new car.
Teach Your Teen How To Make a Budget
Buying a car is a major purchase that can involve making decisions via emotions and reasoning. Your teen could be excited about having their own car, but they still need to think carefully about several financial aspects of the purchase.
How do you start the conversation? Begin by sharing key lessons in planning and budgeting, having a discussion about the difference between buying and leasing, and giving them strategies for comparison shopping.
You can help a teenager cultivate values, habits, and principles that support their future financial well-being when you talk to them about buying their first car.
First, have conversations when it’s comfortable and it feels like you could be productive. Discuss the importance of saving regularly, and how to budget their expected income with their expenses. Teach them the difference between saving for longer-term goals such as retirement and shorter-term goals such as buying a car.
Share savings tips for your teen that can help them meet their goals. For example, you can:
- Explain the “envelope strategy” that divides income into different spending categories.
- Describe how the habit of saving small amounts regularly can pay off over time.
- Show them that by having a target savings goal and a target savings date, they can calculate how much to contribute to a savings account on a regular basis.
Inform your teen that there are more costs associated with owning a car than the purchase price. These continuing costs may include buying auto insurance, paying for gas, repairs, maintenance, parking, and car washes.
You can work with your teen to build the skills they need to achieve specific money milestones. Explore money concepts such as how being frugal can pay off, how they can maintain the right attitude, and how they can practice self-control with spending.
Borrowing vs. Leasing
Buying a car is an ideal time to illustrate how loans and leasing work.
If you’re going to lease or take out a loan for the purchase, teach your teen how to factor these costs into the budget. Help them understand that a loan’s interest is part of the total cost of buying a car.
If your teen's car will be leased, delve into the overall cost of the lease and what steps to pursue when the lease expires. Factoring these costs will bring more clarity to the approach you take when making a budget.
To prepare an accurate budget, teenagers should understand the prices of cars. They can start by getting quotes from multiple sources to help them compare car types and models they are interested in. You can also use hypothetical prices, interest rates, and features to illustrate these lessons in comparison shopping.
Buying New or Used? What To Consider
A car is a major purchase for anyone. Whether your teen is buying new or used, more research will help them get more value. With the right information beforehand, they’ll be less likely to feel pressured into making the wrong decision.
Explain to teens that new cars start losing value as soon as you drive them off the lot, so a well-cared-for used car may be a better bargain. However, with new cars, buyers do get the benefit of a longer warranty and peace of mind of it having no previous owners.
|Buying a New Car||Buying a Used Car|
|More reliable||More affordable|
|Newer safety features||Slower depreciation|
|Longer warranty||Option to buy warranty|
If your teen is buying a new car, help them shop around for the best deal by comparing prices and models with various features in different showrooms. They may also want to enlist a car-buying service or broker to help with the comparisons.
You can teach your teen to plan on negotiating the price since dealers may be willing to go lower on their profit margin to sell their current inventory quickly. Dealers are often willing to bargain on their profit margin between 10% and 20%.
If your teen’s new car will need financing, help them understand that dealer financing may not be the best option. Contact lenders directly and compare their financing options with your teen, even if you will be holding the loan. (You typically must be older than 18 to get an auto loan without a co-signer.) Compare the different annual percentage rates (APRs) and duration of the car loans with them.
Focus on more than just the monthly payment when comparing financing options with your teen. Remind them that the total amount you’ll pay will depend on the car price, APR, and length of the loan.
If you’re helping your teen buy their first car by selling one of your cars, you can discuss trade-in options together with a dealer. In this case, you and your teen need to have first negotiated the best price for the new car and researched your current car’s value so you can get the best price for it.
You can also help your teen do their homework before buying a used car. They can first consider the type of car they need and how they intend to use it before getting price quotes from dealers. Dealer quotes will help them confirm that the car is on the lot, and may help them identify any potential add-on charges the dealer may try to introduce.
Show your teen how to get more information about a dealer before they visit. State and local consumer protection agencies should have a record of any unresolved complaints about the dealer.
Teens should know how to protect themselves from fraudulent deals. They can insist on having an independent inspection of the vehicle. A dealer-provided vehicle history report may leave out mechanical problems despite listing all accidents and damages.
Your teen can check the vehicle’s history through the Department of Justice’s National Motor Vehicle Title Information System (NMVTIS) for accurate information about the title, odometer data, and specific damage history.
Your teen can ensure the dealer puts terms in writing, including any promises to correct defects or make specific repairs. Dealers must reveal whether the used car has a warranty or not. Common warranty options to review with your teen include:
- As-is warranty: The dealer is under no obligation to pay for any problems or needed repairs.
- Full or limited warranty: The dealer covers all or part of the repair costs. A list of what parts and services are covered and for how long must be provided.
A used car can be paid either in full or through financing. Explain to your teen that financing increases the total cost of the car through interest.
Guide them with determining how much will be put down, how long the financing period will be, how big the monthly payments will be, and how annual percentage rates factor in. For example, explain that lower monthly payments are enticing, but they may have a higher total cost if they have higher interest rates and longer loan periods.
Teens may want something stylish for their first car, but safety and reliability are more crucial for new drivers. A safer vehicle can keep insurance rates low. The Insurance Institute of Highway Safety (IIHS) recommends midsize or larger vehicles for teenage drivers to minimize risk.
Option for Paying for the Car
Most states won’t let teens under age 18 own a car. So if they’re a minor, the title of the car usually must be in an adult’s name. Regardless, your teen can play a role in paying for the car. Here are some options.
Pay With Saved Funds
If you and/or your teen have saved enough cash to buy the car outright, you could avoid the hassle and expense of getting an auto loan. If it’s not enough to cover the full cost, the cash could be used to make a down payment for financing, which will reduce the amount needed to borrow.
You can work with your teen to establish who will pay for the car or how much they will contribute. For example, you pay for the cost of their car, then work with them on a plan for them to repay you with regular payments. Or you ]agree to take money from their college savings and have them repay it.
Taking Out a Loan
If you or your teen want to take out an auto loan, start by requesting an “out the door” price from the dealer. This quote should provide the total cost of the vehicle before financing. Then consider the financing options: dealer financing or direct financing. Help your teen consider the amount of money needed to put down, the monthly payment, loan period, and interest rate.
The borrower’s credit history and score as well as their income may affect their ability to get an auto loan. Your teen may need a co-signer on the financing agreement, especially if they are younger than 18.
If you need to take out a loan for your teen, you can work with them on developing a repayment plan. Teens who are older than 18 may be able to take out a loan on their own if they meet credit and income qualifications.
Leasing a car is when you pay to use a vehicle for an agreed period and mileage, but not to purchase it. The monthly payment you make on a lease is typically lower than what you pay toward an auto loan on a similar mode. Another benefit with leasing is that your teen would be driving a new car.
Monthly lease payments include the cost of depreciation during the lease period, rent charges, and taxes. Leasing often has an early termination charge if you cancel a lease.
Most standard leases provide for at most 15,000 miles, and you’ll pay an additional cost if you exceed the agreed annual mileage limit. But you can request a higher limit and increase your monthly payment if your teen expects to drive more.
When you lease a car for your teen, you assume responsibility for any damage, excess wear, and any missing components. You can work with your teen to ensure the car is serviced in line with the manufacturer’s recommendations.
Besides the monthly payments toward an auto loan or lease, some other costs of driving you might want to review with your teen include:
- Car insurance
- Registration and taxes
According to AAA, the annual cost of driving a car (assuming 15,000 miles per year) ranged from $7,114 for a small sedan to $10,265 for a medium SUV in 2019. And although it’s not a direct cost, depreciation in the value of the car is a loss that accumulates over the vehicle’s lifetime.
Frequently Asked Questions (FAQs)
How much should a teenager save before buying a car?
A teenager can consider saving an amount that’s equal to the down payment of a car, usually 20% of the car price, if the car will be financed. A larger down payment reduces the amount that needs to be financed. If they plan to buy the car without a loan, they need to save for the full cost of the car. Of course, the exact amount depends on the cost of the car.
Can my teen buy a car from a dealership?
Your teen can buy a car from a dealership if they are older than age 18. If they are not a minor, they need to either pay for the car in full in cash, or meet financing terms, which include having a good credit history and income. Some teens can get a car loan with a co-signer. If your teen is not 18 years old, the vehicle title will likely have to be held by an adult, depending on state laws that apply.
How old does my teen have to be to buy a car if I’ll be their co-signer?
Your teen must be at least 18 years old to buy a car with you as their co-signer on the auto loan because most states do not allow minors to own vehicles.
Consumer Financial Protection Bureau. "Buying a Car." Accessed Oct. 13, 2021.
Federal Trade Commission. "Buying a New Car." Accessed Oct. 13, 2021.
State of Connecticut, Attorney General. "Buying a Used Car?" Accessed Oct. 13, 2021.
National Motor Vehicle Title Information System (NMVTIS.) "Consumers Don't Be Fooled. Protect Yourself." Accessed Oct. 13, 2021.
Texas Attorney General. "Buying a New or Used Car." Accessed Oct. 13, 2021.
Insurance Institute for Highway Safety. "Vehicle Choice Can Exacerbate Teen Drivers' Risk." Accessed Oct. 13, 2021.
Federal Trade Commission. "Financing or Leasing a Car." Accessed Oct. 13, 2021.
AAA. "Your Driving Costs." Accessed Oct. 13, 2021.