Your Teen's First Car: Cash or Financing?

Once your teen knows how much he can afford, it's time to decide how to pay for it: with cash or financing. While paying cash is usually the most cost-effective method, it is also unlikely that most teens have this kind of money readily available.

Financing options

If your teenager needs to finance the car purchase, there are options to consider and ways you can help.

• Pre-approved bank or credit union financing—Look together for this type of financing. If pre-approved, you and your teen will know exactly how much you can spend when negotiating with an auto dealer or private seller. It will also help set expectations and narrow choices.
   
• Dealership financing—While this option may be available, it isn't recommended. That's because it's often structured so that very little of the principal is paid until the interest is almost completely paid off. As a result, if you want to sell or trade the car in a few years, you might find that you still owe more than the car is worth.