When it comes to auto loans, teens are often at a disadvantage because they typically lack credit history or stable income. This means lenders see them as high-risk borrowers, which increases interest rates and the challenges of getting approved. That said, a teen car loan can be a powerful way to begin building good credit history at an early age, especially if all of the payments are made on time, every time.
Auto Loans for Teens: 3 Tips
The approval tips for car loans for teens are similar in many ways to car loans for people with no credit. Let’s look at them in detail.
- Get the Teen’s Auto Loan Cosigned: This is the #1 priority. Find a parent or trusted elder with good credit who is willing to cosign the auto loan. Otherwise, getting approved for an auto loan as a teenager is a long shot. But keep in mind that the cosignatory is just as responsible for the loan as the primary borrower — it is a big financial commitment.
- Demonstrate Consistent Income: Lenders want to see that you have sufficient money coming in to make your payments. A full time salaried job is best, but not mandatory. Some lenders say payments cannot exceed 60% of take-home income, but a more conservative long-term percentage is 20%.
- Save up for a Down Payment: Being able to put down 10-20% up front will decrease the amount you need to finance. By lowering your car debt from the very beginning, you will be making your car payments lower and more easily paid each month. Additionally, down payments serve as a preventative measure against upside down car loans and negative equity, meaning you’ll be less likely to find yourself trapped with a vehicle that’s worth less than you owe.
- Opt for an Affordable Used Car: New cars are not always the best financial investment, especially if you are a teenager or student. They lose too much value too fast, putting you in a disadvantageous position financially. A pre-owned vehicle will be more affordable to finance and insure, and it will typically hold its value better. For more information on this topic, check out our article on auto loans for used cars.
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