My Son's Auto Loan
The Dollar Stretcher
by Gary Foreman
I brought a car under my name for my son. After 4 months of payments now
he says he can't afford it. There are 6 years on the car loan. Is there
anything that can be done. I can't keep the car. I have a car loan
myself. How do I get out of the loan?
"A smart man makes a mistake, learns from it, and
never makes that mistake again. But a wise man finds a smart man and
learns from him how to avoid the mistake altogether."
Roy H. Williams
Donna has definitely allowed herself to be backed into
a corner. But she has plenty of company. The average car loan is now 70
months (source: Bankrate.com).
That's just shy of six years!
And, because Junior either didn't have sufficient credit or his credit
was too bad to get a loan Donna had to put her credit on the line. Taken
together, it was a financial accident waiting to happen.
So what can Donna do? She has very few options. None of them are very
good. Her best financial option would be to find someone to take over
the car and the payments. But finding that person will be tough. Most
people would rather make an extra four payments and get a brand new car
instead of one that's used.
Donna could go for a voluntary repossession. She would return the car to
the loan company and hand over the keys. They'll sell it. Donna would
still owe them the amount of the loan minus the selling price. She can
expect that to be about 25% of the purchase price of the car. And, the
loan company will come after her for payment. If she doesn't have the
money and can't work out a payment plan, she'll face a damaged credit
score and perhaps even bankruptcy.
Another option would be to sell her current ride. It's possible that she
could sell her car for enough to cover the outstanding loan on it. That
would leave her with only one car and one set of payments. Granted, it's
not the car she wanted and would commit her for nearly six years. But it
does have the advantage of protecting her credit score (which will be
important if she ever wants to borrow money again).
Her best option? Tell Junior to suck it up and act like an adult. He
obviously wanted this car. He agreed to make payments to Mom for the
next six years so that he could get it. Now it's time to live up to his
promise. To do anything else would be irresponsible.
Making those payments will probably mean Junior needs to adjust his
lifestyle. He might need to get a second job. Or reduce a class load to
get a full-time job. The changes will probably be painful to him. That's
unfortunate, but simply the way it is.
If Mom lets Junior off the hook and tries to solve the problem for him
she's only delaying the inevitable. It won't be long before he's having
other debt problems. He'll be unable to keep up with credit card
minimums. Or he'll buy another car that he can't afford. Junior will be
well down the path to financial trouble.
In a way Donna is faced with an opportunity. She can help her son become
a responsible adult by expecting him to live up to his commitments. If
that happens any inconvenience to Junior's lifestyle will be worthwhile.
Financially Donna doesn't have many good options. They were taken off
the table when she agreed to take on a six year loan for her son. But,
hopefully we can be like the wise man who learns from Donna's trouble.
What lessons are there for the wise?
Don't sign an auto loan for your children. If reputable lenders aren't
willing to give them a loan, you shouldn't either. The chances are too
great that you'll end up making the payments for them.
Children need to build up their own credit score. The best way to do
that is to start small and demonstrate an ability to make promised
payments. Getting an auto or home loan is the last thing you do. Not the
first. And, getting Mom or Dad to co-sign the loan isn't the way to do
Secondly, a six year auto loan is too long. No one knows what their life
will be like in six years. Circumstances change. What you need in a
vehicle will likely change, too. It's much easier to trade rides when
yours is paid for.
The only reason to extend from a four year to a six year loan is to
reduce the monthly payments. The dealer will be willing to do that. But,
there's another, better way to get affordable payments. Find a cheaper
Hopefully Donna and her son will get through this financial crisis and
be much smarter the next time they go out to buy a new car.
Gary Foreman is a former financial planner who currently edits The
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