When a teenager approaches driving age, he or she starts getting an itch for a car. And, this itch is made even more intense by the fact that most of their friends are also getting cars. Not to mention the huge pressure that the popular media like movies and music place on young people owning their own set of wheels.

To a young person, a car represents a lot of things. It means freedom to go hang out at the local burger joint on a Saturday night. It represents the ability to drive oneself to a part-time job. And, it means being able to go visit friends and relatives who live nearby whenever they want.

Benefits To The Entire Household

Parents love it, too. Provided that the kid is responsible, a parent can use to their advantage the fact that their child now owns a car. Quick afternoon trips to the grocery store to pick up a gallon of milk – something of a chore for most busy parents – becomes in the eyes of the young driver a chance to get a little more driving practice in before dinner.

As much as having an additional car in the household can benefit families, it certainly represents an additional expense. Some young people “luck out” and inherit one of their parents’ aging autos. Meanwhile, others have put away thousands of dollars through part-time work and summer jobs to buy their first car. But sometimes all of that is not enough. In those cases, unless the parents have the extra money lying around to help out with the purchase, auto financing is usually what is called for.

Financing Under The Teenager’s Name Can Be A Challenge

As most people over the age of 20 are fully aware, the entire auto financing industry lives and dies by the credit score. Essentially, the credit score of the would-be borrower determines whether he or she will be offered a loan. And, if they are offered a loan, the credit score determines the interest rate at which it will be offered.

This hard, cold fact makes it particularly challenging for young people who do not yet have an established credit score to qualify for auto financing. That is, if a young person walks into a bank or auto dealership and asks for a loan, their credit score (or lack thereof) demonstrates to the lender that the young person should not be offered car financing.

Financing A Car For Kids: The Benefits and Risks of Co-Signing

A solution that many families take advantage of is something called co-signing. This simply means that the parent or relative of the kid can add their name to the loan. Essentially, both persons’ names (and credit scores) are associated with the loan.

The obvious benefit of this arrangement is that the young person is able to get a car whereas without the co-signing arrangement, he likely would not. Given the importance of car financing for most teenagers to be able to buy a car, this is no small detail.

Another benefit of co-signing is that the teen gets to start establishing his or her credit. By being a co-signer of the loan, the Big 3 credit agencies can start building a credit profile on this young person. This will help the teenager down the road, since as they get older, having a strong credit score will be very important.

The main risk of co-signing the loan falls on the shoulders of the adult co-signer. And that risk is: if the young person ever defaults on the loan by failing to make the monthly payment, the lender will hold the co-signing adult responsible, as well.

Provided that the adult co-signer trusts the young person to repay the auto loan, then financing a car for kids through co-signing can be a smart option.

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Category: Finances
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