Buying your teen a car: What it really costs

There are a few ways you could approach buying your teen a car. You could pay for it outright with money you’ve saved up. You’ll be the legal owner until they are old enough to own a vehicle—18, in most states—and you can transfer the title.

If you need to get a loan for the car, and your teen is under 18, you’ll be legally responsible for the payments, since a minor can’t sign a binding contract. At 18, they may be eligible for a loan but could have trouble getting one with favorable terms if they have little to no credit history. If they’re ready for the responsibility, you could cosign the loan. But remember that you’ll also be responsible for the payments and any failure to pay would affect your credit. Also, the loan would count as part of your debt-to-income ratio. 

You’ll also need to insure your teen’s car. If you already have them on your insurance policy, you’ve probably seen how much premiums can go up. Adding a teen driver increases a family’s annual premium by 78 percent or $671 on average, according to a 2017 study by insuranceQuotes.com. You’ll see another increase once you buy their car and add that to your policy, though exactly how much depends on the characteristics of the car. Still, this is generally much cheaper than having them get their own policy, even if they’re old enough.

Now for the fun part. Start researching online to see what kind of vehicle you can get for your budget.

Your priorities for your teen driver may be different from what you’d want for yourself. Take size: For a new driver you might consider larger cars, which are often safer. A midsize sedan might withstand a crash better than a compact vehicle, and its low center of gravity generally makes it less likely to roll over. To encourage safe driving, look for cars that don’t highlight horsepower. Cars with smaller and more practical engines and drive trains could discourage speeding and are also more fuel efficient.

Involve your teen as you consider features: It’s a great time to bring to life real-world financial decision-making. You can explain that you need to make certain trade-offs to find the right combination of features at a price that won’t strain your family budget.

One obvious trade-off to consider: Will you buy new or used? While new cars are more expensive, of course, they may offer safety features that aren’t available in older vehicles, from backup cameras to driver-assist technologies such as automatic braking. You can also consider a certified pre-owned vehicle. It may cost more than other vehicles but may come with a limited warranty.

Talk to them about how much you expect them to contribute to the car costs, which could total $6,968 each year, according to a study from Driving-Tests.org. Besides the price of the vehicle and the insurance, there will be fees for the registration, inspection and license plate. And once they’re a regular on the road, they’ll also have to pay for gas, tolls, parking, cleaning and maintenance.

Explain why you’d like them to chip in: It involves them in the process and responsibilities related to owning a car and prepares them for the day when they’ll handle everything on their own. Plus, they might drive more carefully if they contribute to the insurance bill and the repair of any scrapes or dings and if they cover their own parking tickets and traffic violations. This conversation can also teach important lessons about money management. For example, when figuring out how you’ll divvy up the expenses, you can discuss budgeting principles and ways to adjust spending, which teens can apply to their own budgets.

Once you’ve established who’s paying for what, set ground rules for using the car, for example, no dialing, web surfing, selfie-taking or texting while driving—ever. Also discuss how many people can be in the car at once. Who else can drive it? How far can they go? Do they have to be home by a certain time at night?

Make sure you and your teen agree on all these conditions before you hand over the keys. When everyone’s expectations are clear, you’re likely to hit far fewer speed bumps.