Is Lending to Your Child Worth the Risk?
Helping a Desperate Sister
Co-Signing a Loan
I brought a car under my name for my son. After four months of payments, now he says he can't afford it. There are six 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. Hopefully, we can be like the wise man that 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 it, either.
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. However, there's another, better way to get affordable payments. Find a cheaper car.
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 and purchasing manager who currently edits The Dollar Stretcher.com website and newsletters. He's been featured in MSN Money, Yahoo Finance, Fox Business, The Nightly Business Report and he's a regular contributor to US News Money and CreditCards.com. You can follow Gary on Twitter or visit Gary Foreman on Google+.
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