Should you co-sign a car loan for your teen?

Both of my kids are a decade away from even learning how to drive, but I can image a time when they’ll want to buy a vehicle of their own instead of borrowing an old jalopy from their dad.

Buying a car can be tricky for a teenager because he or she likely hasn’t established any credit history and so they wouldn’t necessarily qualify for a loan. (Plus, insurance costs for teens are also likely to be higher.)

Paying cash is an option, but most working teens can’t afford more than a few thousand bucks to put down on a car. Besides, I know I’d want my daughters driving something safe and reliable, which often means moving up the price point.

This begs the question: should you co-sign a car loan for your teenager?

Co-sign a car loan? What to consider

Remember why a co-signer is needed in the first place. It’s because the person applying for the car loan doesn’t have sufficient credit history, reliability, or income to get the loan on his or her own.

The first thing you have to consider as a parent is that if you choose to co-sign a loan and your son or daughter can’t make the monthly payments, you’re on the hook for the entire amount borrowed.

Make sure you can afford to take on the debt if your co-borrower can’t meet his or her financial obligations. Also consider your own credit needs in the short-to-medium term. Co-signing a loan could impact your ability to borrow for another purpose in the future.

Next, before co-signing a car loan with your teen, the two of you need to discuss the financial terms of the loan and how it impacts their budget. Does he or she earn enough income to not only take care of the monthly loan payment, but also the cost of operating the vehicle, including gas, insurance, and regular maintenance?

It’s nice to think there should be a strong and loving bond between parents and their teens. However, we know that financial difficulties can put a lot of stress on relationships. Consider the impact of your teen failing to repay the loan and the bank or financial institution coming after you for recourse. Will that damage your relationship?

Co-signing a car loan for your teen is fine if the intent is to build good money habits and install a sense of financial responsibility. Mom and dad (and their good credit rating) are there for support and to pick up the slack if their teen missteps or falls down. But it’s up to the teen to make the payments fit into their budget and pay off the loan in full and on time.

It might be 10 years before my kids get the urge to buy their own vehicle but I want to be prepared for when they do. Co-signing a car loan will definitely be an option to consider, but before we do I’ll go over a number of other options with them, including:

• Lending out the family car for use during the evenings and on weekends
• Taking public transportation
• Saving enough money to pay for a vehicle upfront in cash
• Waiting until a time when a mix of their own cash and credit worthiness can get them the car they desire

With a little planning, buying a car can be a good money lesson for teens.