Financial Resource Center


Help Your Teen Afford the Right Car

by Darla Dernovsek / February 6th, 2016

It's essential to consider safety, affordability, and reliability when buying a teen's first car, according to William Van Tassel, Ph.D., manager of driver training operation for the American Automobile Association (AAA), Heathrow, Fla.

Be prepared

Van Tassel says parents should ask teens to prove they're ready for a driver's license through requirements such as maintaining good grades or completing household chores.

Teens also need to learn how much it costs to drive. Parents can start the process by telling teens the cost of gasoline, insurance, and repairs as they pay family bills. Ask the teen to help care for the vehicle she eventually will drive by regularly washing it, checking fluid levels, and keeping the maintenance log.

Aim for a series of short discussions to minimize resistance and allow teens to absorb each lesson.

"Start these talks half a year, at least, before a teen is actually eligible for a learner's permit," Van Tassel says.

Even after teens get a license, Van Tassel suggests waiting to buy a vehicle until it's truly needed.

Instead, set rules for the teen's use of the family vehicle, including when the teen can drive and who can ride along. This reinforces many state driver's license policies that limit teens' driving hours and the number of passengers in the vehicle.

Your credit union is a smart first stop for teens looking for car financing.

It also gives parents time to temper the teens' expectations about buying a car.

Look for safety

Van Tassel says parents should insist that teens choose a safe vehicle, using information offered by websites such as AAA, the National Highway Traffic Safety Administration, and the Insurance Institute for Highway Safety. Van Tassel urges parents to look for vehicles with at least three safety features:
  • Air bags, including side impact air bags, which can reduce injuries in a crash.
  • Antilock braking systems, which can provide directional control in emergency braking.
  • Electronic stability control (ESC), which can help reduce rollovers.
A used sedan with a four-cylinder engine is often a good option. In general, avoid sports cars, pickup trucks, and sports utility vehicles.
Even after teens get a license, it may be a good idea to wait to buy a vehicle until it's truly needed.

Understand the cost

The combined cost of owning and operating a car is another lesson to share with teens. The 2015 edition of the AAA's Your Driving Costs survey puts the average annual cost of driving a sedan 15,000 miles a year at 58 cents a mile—$8,698 a year, including purchase price and operating costs. Put that figure into perspective for teens by converting a prospective vehicle's cost into hours worked. To get an approximate figure, take the number of miles the teen will drive each year, multiply it by 58 cents a mile, and divide the result by the teen's hourly wage. It typically takes the equivalent of months of hard work to cover vehicle costs on a teen's income.

Get a loan

Your credit union is a smart first stop for teens looking for car financing. For example, teens who seek their first vehicle loan from one New Mexico credit union must meet with a financial consultant, according to the associate vice president, membership development.
A used sedan with a four-cylinder engine often is a good option for young adults.
A financial consultant checks the teens' credit scores and talks with them about what they can afford to borrow. The adviser emphasizes the importance of building a good credit score by paying on time. The adviser urges teens to create a financial plan to cover operating costs, plus a savings fund containing three to six months of payments and expenses. They need to think about the next set of tires they'll need or what happens if they are home sick for two weeks and can't work, for example.

Make an agreement

If parents have a financial stake in the teen's car—a down payment, loan payments, insurance, or other costs—then one credit union lender advises parents and teens to create a written agreement. The agreement should cover:
  • Who pays for specific types of expenses, such as insurance or repairs.
  • How the teen's behavior affects driving privileges.
  • What the consequences will be if the teen fails to live up to the agreement.

Go Shopping

On a teen's income, it typically takes the equivalent of months of hard work to cover vehicle costs.
Teens also need to learn about dealer practices and negotiating the best price. Parents can help by sharing their experiences and going with teens as they shop. Urge your teen to ask these questions:
  • Is the dealer reliable? Check for complaints with the state attorney general's office or the Better Business Bureau. Some credit unions share a "preferred dealers" list with members; check with your credit union.
  • Is the vehicle in good shape? Get the vehicle inspected by a good mechanic. Consider looking for used cars that are "certified" as meeting the manufacturer's resale standards.
  • What is the bottom line? Remember to add sales tax, title fees, and license fees to the sticker price.
  • Learn about specialized insurance products. After a crash, gap insurance covers the difference—the gap—between the amount owed to the lender and the amount covered by insurance. Mechanical breakdown insurance helps pay for major repairs. Many credit unions offer these products to members at better rates than the dealerships.

    Avoid the rush

    Many credit union lenders have seen teens rush into "deals" only to find they paid too much, agreed to a loan at exorbitant interest rates, lacked a clear title, or bought a car with serious defects. Parents and teens alike can benefit from taking time to share stories, do their research, and consider what owning a car will cost over time. It saves a lot of headaches in the long run.
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