Financing Questions

As most teens gain their driver's license, figuring out what they'll drive becomes the next big issue. And unless the vehicle being purchased is a beater that costs a few hundred dollars, the subject of how to pay for that new set of wheels inevitably will lead most discussions.

Before you ever set foot in a dealership, decide if you will lease or finance, shop rates, and determine affordability and its effect on what type and age of vehicles are within your reach. For traditional financing, consider sources such as the dealership (which may offer competitive rates through the manufacturer), a local bank or a credit union. Shopping for a loan over the internet is another possibility, although it is difficult for young adults to borrow money without a parent or older adult to cosign.

When you've settled on a source of financing, it's time to consider a more difficult issue: Who pays for what?

Families may want to discuss several scenarios. For instance:

  • Parents agree to handle monthly car payments; the driver pays for insurance, maintenance and fuel, as well as any extras such as parking tickets.
  • Parents cosign on the financing and cover insurance; the driver pays all or some percentage of monthly payments, maintenance and body repairs in case of a wreck. If he or she totals the car, game over; the driver is on his or her own.
  • Parents cover everything; the driver becomes the perfect child, gets straight A's, and does all the household chores and frequent charity work. Washes the car weekly. Mom's, too. And Dad's. Etc.

It should be very clear from the outset who is paying for what — and what would sour the arrangement.

Here are some other considerations to think about while arranging financing:

  • Some degree of stability is needed to make monthly payments, but for young adults, future employment is often unpredictable.
  • While leases generally have lower monthly payments than loans, most leases levy a harsh penalty if terminated early. Conversely, the same car under a conventional loan has higher payments but can be sold at any time.
  • If a child abuses his or her driving privileges or violates a family rule, their parents may choose to confiscate their car. But do you want to pay for a leased vehicle to sit at the curb? Or pay the penalty for early termination?
  • Who is going to be responsible for making sure the vehicle is fueled, maintained and repaired? It's best to decide who is responsible — and who pays — for these items up front.

Knowing the responsibility level and personality of the prospective purchaser — as well as those of his or her parents — will help make this decision.

© 2/11/09