What teens (and adults) need to know about car buying

Aside from a home, buying a car is one of the largest purchases most people will ever make.

The process is daunting enough for adults, but it can be overwhelming when you have a teen or adult child in the market for his or her first ride.

Here’s a typical scenario: Your offspring has a part-time job and has been saving, but doesn’t have enough to purchase the car without a loan. What’s a parent to do? How do you help them gain the independence that comes with having their own transportation without taking on too much debt?

With three now 20-something children, I’ve got a lot of experience in purchasing cars for a teenager. Along with advice from Ivan Drury, director of insights at Edmunds, here’s how to navigate the first-time car-buying process.

The car

Before starting the search, you need to manage expectations, especially if money is tight. So, no, they can’t get a sports car, luxury vehicle or something new off the assembly line.

“I’d say, number one, you have to curb your child’s enthusiasm,” Drury said.

Sure, your child should have some say, but if you have to put up most of the money, or take on a loan on their behalf, then you should have veto power.

The price

Be ready for extreme sticker shock.

There’s a car-buying trifecta driving up prices right now: inflation, soaring insurance premiums and higher auto loan rates.

“While inventory has improved, which has led to some discounting, vehicle prices remain elevated, and high borrowing costs have only made buying a new vehicle more challenging,” Edmunds said in its latest trends report.

For the second quarter, the average amount financed for a new car was $40,873. That came with a term of 69 months, a $6,579 down payment and an average interest rate of 7.3 percent.

The average monthly payment reached a record $740, compared with $735 in the prior quarter and $733 a year ago. The share of borrowers with loan payments of $1,000 or more a month for a new car was 17.8 percent in the second quarter of 2024, just below the record 17.9 percent set at the end of 2023, according to Edmunds.

The average financing amount for a used vehicle was $28,166, with a monthly payment of $552. The average interest rate was 11.5 percent, with a down payment of $4,140.

Set a budget before the car search and stick to it. It is possible to find a reliable used car.

Parenting means shutting down the financially unreasonable no matter how much your child pleads.

“There are vehicles available at every price point,” Drury said.

Here’s how my husband and I found a $2,000 car for our youngest.

We have a great mechanic, who buys vehicles that have been in accidents and fixes them up for resale. Most of his acquisitions just need body work. We made an offer on a 2000 Toyota Camry he was repairing and our daughter wound up driving it for about six years. It never once left her stranded on the roadside.

Look for private sales in addition to vehicles sold by dealerships. With some good sleuthing online, starting with Edmunds and other car-shopping sites, you can find a great deal for a reliable used car.

But what about all the safety features on new cars, you might ask.

“If it’s new enough, let’s say built in the last 20 years, it’s going to be safe enough,” Drury said.

And you might not want your teen too reliant on new technology and become a less cautious driver, he said.

The financing

If you can, pay cash. And yes, this may mean a much older car, or a second- or third-choice make, model or color.

If you decide to finance the purchase, consider the long-term impact for you and your teen.

Sure, they promise they will cover the loan with their earnings. But what if they lose their job? What if working and going to school becomes too much of a burden and they need to quit?

You need to be able to cover the monthly payment, so build that possibility into your budget. Don’t let the excitement of this milestone event cloud the reality of your household financial situation.

If your child is of age, they may be able to get a loan with you as a co-signer. I wouldn’t do it, but if you decide that is the only way forward, understand what co-signing means.

You are not a backup borrower. You are on the hook for the loan — all of it. Any late or missed payments can show up on your credit files. And because the loan is counted in your total outstanding debt ratio, it could bring down your credit scores and/or affect your ability to borrow.

Get your child to help with looking for a lender and pricing out loans; in fact, they should lead the process.

Check whether either of you can get financing through a credit union, which often offers lower rates than banks or a dealership. Use the National Credit Union Administration’s locator to find local options.

The insurance

Have your child do the work of comparing insurance rates. This also has the effect of tempering their desire for a more expensive car.

“The insurance rate is just going to be ugly, especially if there’s already something tarnishing the driving record of the existing plan holders,” Drury said. “By throwing someone under the age of 25 in the mix, it’s just going to put fuel on the fire of the insurance rate.”

The risk of motor vehicle crashes is higher among teens 16 to 19 than any other age group, according to the U.S. Centers for Disease Control and Prevention.

Adding a 16-year-old to an adult policy costs on average $250 per month, according to Investopedia.

The car fund

The work isn’t done yet.

After your son or daughter gets the vehicle, make sure the next step is consistently saving for maintenance and car repairs.

Most importantly, use this process as a life lesson for smart buying and decision-making, which may mean opting for less than they want.

If you want more personal finance advice that's timeless, order your copy of Michelle Singletary's Money Milestones.