Car loans for teens. Do they exist?

Teenage boy driving a car with his dad in the passenger seat, both of them are smiling Image: Teenage boy driving a car with his dad in the passenger seat, both of them are smiling

In a Nutshell

If you’re a teen dreaming of buying a car, you’ll have to wait until you’re at least 18 to apply. You’ll have to overcome some hurdles, such as not having had time to establish a solid credit history. But there are some auto lenders out there that consider people who have a limited credit history. And if you can show a reliable source of income or can add a co-signer to your application, you may improve your chances of qualifying for an auto loan.

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Car loans for teens exist, but you may have more difficulty qualifying for one than someone with an established credit history who has good credit.

That’s because banks, credit unions, online lenders and auto finance companies prefer to loan money to people who’ve shown they can manage their credit and have a history of on-time payments. While some lenders consider people who have little or no credit history, beware that you may be charged a higher interest rate for your loan than someone with a long track record of making on-time payments.

Before you decide whether getting a car loan is worth it, let’s take a look at how teens can finance a car, what to watch out for when car shopping, additional costs to consider when buying a car, and other ways to pay for a vehicle if you can’t get an auto loan.


How teens can finance a car

If you haven’t turned 18 yet, you’ll need to find another way to purchase a new set of wheels. But if you’re at least 18 years old, you may be able to get an auto loan on your own.

Here are a few financing options to consider.

Look for lenders that work with people who don’t have a long credit history

Some lenders specialize in working with people who have little or no credit. But you’re unlikely to find one that will grant you a loan if you can’t make your payments on time. So, be prepared to show that you have a reliable source of income.

Learn more: Why is credit important?

Find out if you qualify for special financing

There are lenders and auto manufacturers that have special programs for first-time car buyers and students. These programs rely on factors other than your credit history —  like GPA, income and down payment — to determine if you qualify for an auto loan.

Check with your local credit union

If you belong to a credit union, or you’re eligible to join one, consider checking out its financing options. Credit unions may have more flexibility to take on riskier borrowers, including those without good credit or with little credit.

Get a family member to co-sign the loan

Adding a co-signer with good credit to your application may improve your approval odds and help you qualify for a lower interest rate, because their credit history is considered as well. But the co-signer is also on the hook for the loan, and if you fail to make your payments on time, it will negatively affect their credit scores along with yours.

Pitfalls to avoid when shopping for your first car

Buying a car is a big decision that can affect your finances for years. Here are a few common mistakes to avoid when car shopping for the first time.

  • Spending too much — Before buying a car, it’s important to create a realistic budget and stick to it so that you don’t spend more than you can comfortably afford.
  • Buying a new car — It’s easy to get excited about the bells and whistles you can add to a new car. But a new vehicle can lose about 20% of its value within the first year. Buying a safe, reliable used car could save you thousands.
  • Not doing your homework — Car prices can vary based on the make, model and accessories you choose. Take some time to research prices at multiple dealers in your area to ensure you’re getting a good deal.
  • Not shopping around for car loans — Eligibility requirements vary from lender to lender. Shopping around lets you compare multiple lenders so that you can choose the one with the most favorable rate and loan term for buyers with little-to-no credit history.
  • Paying too much attention to the monthly payment — It’s easy to overspend when you focus on your monthly payment instead of the total cost of the car. Let’s say you budget $15,000 for a car, but when you get to the dealership, you fall in love with an $18,000 car. If you get a 60-month loan term with a 5.5% interest rate, your monthly payment would increase from about $287 (with a $15,000 loan) to $344 (with a $18,000 loan). But you’d pay an extra $438 in interest in addition to the $3,000 you didn’t plan to spend.

Additional costs to consider

If you’re thinking about buying a car, you’re probably most concerned about the purchase price of the car and the interest rate on your loan. But there are many other costs to consider. Here are a few.

  • Car insurance — It’s typically cheaper to get added to your parents’ policy than it is to get a separate one. Many insurance companies offer discounts for getting good grades, completing safe-driving programs and more. But before you buy a car, do your homework to find out what discounts you qualify for, get a quote from the insurance company and decide who (you or your parents) will pay the bill.
  • Day-to-day expenses — Don’t forget about the cost to fill up your tank, cover tolls and pay for parking.
  • Routine maintenance — Periodic checkups that may include changing the oil, rotating the tires, replacing air and oil filters, and more are essential to keeping your car running smoothly. Unless you can take care of these yourself, you need to find a way to pay for them.
  • Major repairs — Hopefully, you won’t be faced with a major repair any time soon, but it’s important to be prepared if something breaks and you need to pay to have it fixed.
  • Auto insurance deductible — No one wants to get in an accident, but if you do, you will likely be responsible for paying your insurance deductible.

Alternatives to getting a car loan

If you want to get behind the wheel of your own car but you can’t qualify for an auto loan or you’re under 18, here are a few alternatives to consider.

  • Save up and pay cash. It takes planning, hard work and patience. But you could work until you save up enough money to pay cash for your vehicle.
  • Ask your parents for a loan. They may be willing to lend you the money to buy a car, and you could pay them back over time.
  • Work with your parents. If your parents can help financially, consider asking them to match what you save, up to a certain amount. For example, if you save $7,000 to buy a car, maybe they can also contribute $7,000.

What’s next?

Before you start car shopping, create a budget and stick to it so you don’t overextend yourself. Consider applying for preapproval for an auto loan. With preapproval, you’ll know the maximum amount you can borrow and what your estimated interest rate could be. Plus, it can put you in a better position to negotiate when you’re at the dealership. But know that those numbers aren’t final — you’d have to formally apply to find out the loan’s true terms.

If you’re 18 or over and you can’t qualify for an auto loan because of your credit history, work on building your credit to improve your chances of getting approved for a loan in the future.


About the author: Jennifer Brozic is a freelance financial services writer with a bachelor’s degree in journalism from the University of Maryland and a master’s degree in communication management from Tow… Read more.