Between school, extracurricular activities and maybe even employment, it's not uncommon for teens to bounce around from one place to another during the day. Those people who are tired of walking, taking the bus or being shuttled around town by their parents may be thinking about buying their very own set of wheels. The process for doing this isn't that simple, unfortunately.
Generally, you have to be a minimum of 18 years old to acquire a car loan, and things aren't easier for minors looking to pay in cash. This is what to expect when car shopping with your teen.
How Old Do You Have to Be to obtain a car loan?
An car loan is really a legally binding contract that lays out the financing details of an automobile purchase. Minors can sign contracts, but they can't be held towards the terms of an agreement until they get to the “age of majority”—which is 18 years of age in nearly every state. As a result, few lenders are prepared to extend a loan to a minor, and the ones which do require a co-signer.
A lender will want to see a recognised credit rating as well, that also presents a roadblock for minors. A small shouldn't even have a credit history unless they've been added as an authorized user with an account belonging to a grownup.
If you're a grownup with a teen driver in your own home, one choice is to get the borrowed funds in your own name. When you satisfy your payment plan, you'll be the vehicle's legal owner and may then transfer the title to your adult child's name when they come of age. Your payment activity is reported towards the credit agencies, which means the loan will show up on your credit report.
Car insurance coverage is another detail to think about. The insurance plan is itself another kind of contract, therefore it is definitely the same legal hurdle the borrowed funds does for minors. One workaround would be to incorperate your teen to your own car insurance policy. You can think about taking them off when they turn 18, however they may find it difficult to find affordable coverage by themselves as teens are generally seen as riskier drivers.
A insufficient credit rating may also pose a problem since auto insurers in lots of states can consider your credit-based insurance score when deciding your premium. For this reason many parents decide to keep their kids on their own auto insurance until they've got more experience driving and are in a position to cover their very own insurance payments.
Is There an Age Requirement to purchase a Car With Cash?
Things aren't so simple in case your teen wants to buy a car in cash. To begin with, most states won't allow someone younger than 18 to have a car title within their name. There are several exceptions—Texas, for instance, does allow minors to title a car. You can check with your state's motor vehicles department to explain exactly what the law says.
Beyond obtaining the title and registering the vehicle together with your state, there's still the problem of the teen being able to legally drive the vehicle on the road, which requires car insurance. As explained above, minors will require an adult's help here.
Additional Car loan Requirements
Those planning on getting a car financed for their teen driver will need to meet the prerequisites to become approved. Every lender differs, but you can expect these to look into the following:
- Credit: Car loan lenders will consider your creditworthiness when looking for your loan application. Stronger scores, for instance, can claim that you are a responsible borrower who's unlikely to miss a payment. This often translates to better rates and borrowing terms. The alternative is also true—poor credit could jeopardize what you can do to be eligible for a an affordable auto loan.
- Income and employment: Despite perfect credit, lenders want reassurance that your budget has room for any car payment. A lender will probably inquire about your income and may verify your employment situation to ensure that you have a reliable and steady income. You'll likely have to provide recent pay stubs (or bank statements if you are self-employed) when applying.
- Identity and residence: Anticipate to provide your government-issued ID and evidence of residence when applying for a car loan. This really is to verify your location should the lender have to contact you regarding a future missed payment.
How and Where to obtain an Auto Loan
Auto loans can be found through car dealerships, banks, lending institutions and even online lenders. Before you decide to submit an application, consider crossing the following action items off your to-do list. Doing this can help streamline the procedure and save a little money:
- Check your credit score. Again, your credit can make a huge difference when it comes to getting approved. Additionally, it may impact your interest rate and loan terms, which affect just how much you at long last pay within the lifetime of the borrowed funds. If possible, it's wise to check on your credit many months prior to making an order which means you know where your scores stand. You'll also wish to review your credit history to make sure there aren't any major red flags that could tank your loan application. That said, there are things you can do to obtain a auto loan with poor credit.
- Determine your financial allowance. Before test driving your teen's new car, figure out how much you can reasonably afford. Are you spending money for it yourself, or will your son or daughter be contributing in some way? In either case, visiting the table with a deposit with a minimum of 10% is usually required when seeking an auto loan.
- Shop around for car loans. Comparing quotes from different lenders can pay off over time. If you are worried about the impact submitting multiple credit applications might have on your credit scores, doing this inside a short time frame can help minimize the impact.
If you wind up going with a bank for your car loan, getting preapproved can help provide you with some leverage when negotiating with car dealers. You may also be able to finance your teen's new car directly via a dealership. Either way, comparing offers can save you money over the long term.
The Bottom Line
Buying a car can be tricky for minors. Between financing and insurance, an adult will need to part of sooner or later if your minor is hoping to buy a new vehicle they can legally drive. That said, planning ahead and understanding your financial allowance can help you protect your personal financial health on the way. You are able to avoid unwelcome surprises by monitoring your credit free of charge with Experian. It's a simple move that can help you keep your credit score going strong.