Wednesday, 16 April 2014

How To Prepare Your Kid To Buy Their First Car

By Aaron Crowe

Buying a car can be a teenager’s first major purchase on their own, vaulting them into the adult world of loan payments and mechanic bills.

Preparing for that first car can require a lot more than taking driver’s ed classes and driving mom to the grocery store. Choosing a car, buying insurance and figuring out how to pay for the car — either through a loan, money saved or a gift from parents — can be quick lessons in budgeting.

Whether they’re buying a car to get to a job during high school, commute to college or to a new job after graduating from college, here are some things to consider when preparing your student to buy their first vehicle:

Need a loan?

Unless parents are giving their kid a chunk of money, or the student has saved money from working, a car loan will likely be necessary. For most teens, unless they have a job that pays well, they’ll need a parent to co-sign the loan. That means that if a car payment isn’t made, the co-signer is responsible for the loan, even if the car is repossessed.

“If you don’t have someone to co-sign the loan with you, you’re going to have a much higher interest rate,” says Gene Natali, co-author of “The Missing Semester,” a book about financial choices for students.

Especially for high school students with limited incomes, setting a budget and a payment and interest rate that they can afford each month is smart.

“Having an auto loan and paying it off can be a great way for a young person to establish good credit and will help down the road with other loans such as home or business,” says Soren T. Christensen, a certified financial planner at Advanced Wealth Advisors in Naples, Fla.

Parents can also help their kids establish credit by allowing them to get a credit card with a small limit so they can learn to manage credit and set good habits, Christensen says.

As anyone who has negotiated with a car salesman can attest, financing a loan with a car dealer can be the worst part of the transaction. Matthew Sauers, who graduated last year from the University of Pittsburgh with a bachelor’s degree in business administration, spent much of three hours at a Volkswagen dealership trying to get a better interest rate.

“It was just annoying after awhile,” Sauers says of the three salespeople who continually told him they couldn’t give him an interest rate to get his monthly payment to what he wanted.

“To their credit, I started getting more and more attached to this car,” he says.

After getting turned down again for a low interest rate, Sauers’ friend, who he brought with him to encourage him to walk away if the deal wasn’t good enough, got him up to walk out the door. The salesman ran after him and the car dealer offered an interest rate normally for someone with a longer credit history.

After walking in with a bank loan already approved at 4.8% interest, the dealer dropped its rate to 2.29% for five years for a 2011 certified pre-owned VW Jetta for $16,900.

You don’t need a sunroof

Peer pressure to get the latest gadgets with a new car, such as a navigation system, can be high, but the prices should bring a teen back down to reality.

Customizing a car with paint, tires, graphics and other items can also get expensive. For a car to hold its value, avoid vibrant colors and expensive treatments.

If the added costs don’t persuade your teen, then Natali suggests thinking about putting the money that would have been spent on an upgrade and putting it in a savings account and earning compound interest to show how far that extra payout can go.

“Let your savings dictate how much you can spend on the car,” he says.

Buying a first car should be fun, but it can also be overwhelming. “The temptation to spend more than you should can be high,” Natali says. “That temptation is much higher when the sunlight is glistening off the hood of that brand new car on the dealer’s floor. Know how much car you can afford — before you buy it.”

New or used?

A used car can be much cheaper than a new one, and can reinforce the idea that the purpose of a first car is to safely and reliably get you from point A to point B, Natali says.

It’s not meant to impress your friends or put you on the road to money problems, he says.

It’s also important to remember that a new car becomes “used” as soon as it’s driven off the car lot, dropping in value. And even if the monthly payment is higher with a new car, the expenses of gas, insurance, maintenance and other costs are likely to be higher than the monthly car payment.

In a survey of 32 students in her class at Fox Chapel Area High School in Pittsburgh, PA, teacher Jill Tabis found that five students planned on buying a car before graduation, and all five planned on buying used cars. When paying for car insurance, most either had a job or were saving for the expense, and one student said their parents would help pay for insurance.

Lessons for young kids

If you have children who aren’t at the car-buying age yet but you still want them to learn the basics of how to pay for a car, the virtual world of Whyville is a way to buy virtual cars with a virtual credit rating and virtual car loan. Developed with Toyota Financial Services and Scion Inc. as an educational tool, Whyville doesn’t require real currency to buy anything, says Jim Bower, CEO of Numedeon Inc., the company behind the site.

“Most adults don’t know what a credit score is or how it’s built,” but kids ages 8-14 are learning it at the website, Bower says.

If a user misses a car payment, their virtual car is repossessed — which has led to some upset parents calling with excuses from their upset children that have included being away on vacation and unable to make a virtual payment, to the dog eating the Internet cords. Repossessions are uncommon, Bower says, which shows how much kids care about their cars.

“Kids figure things out by making mistakes,” he says. “Then they go back and don’t make the same mistakes again.”

We should all be so smart.

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