Is your child considering applying for their first car finance agreement? Our car finance expert, Verity Hogan, shares her quick guide to everything you might need to know as a parent
Will my child qualify for a car finance loan?
While your son or daughter can legally get behind the wheel as soon as they turn 17, they’ll need to wait until they turn 18 to apply for their first car finance agreement.
But age isn’t the only factor that will affect their ability to secure a loan.
What factors affect my child’s car finance eligibility?
There are a few different things to keep in mind if your child is considering applying for car finance:
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- Their credit score
Credit isn’t the only factor that lenders consider, but it is an important one. As a young driver, your child probably won’t have much of a credit history yet, or maybe none at all. This can make lenders wary as they don’t know how they’ll act as a borrower.
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- Their affordability
If your child is a full-time student or has just started work so their income is low, they may not have a lot of spare cash available to put towards a car loan. Responsible lenders must be sure that any loans they offer are affordable for the borrower and won’t lead to them ending up in financial difficulty.
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- Their deposit
Along with a lack of income comes a lack of deposit. This increases the loan to value ratio and the amount your child will need to borrow, again making them a riskier option for lenders.
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- Their dream wheels
While your kid might have been dreaming of that high-performance set of wheels ever since they turned 12, their first car might have to be a bit more pedestrian. More expensive cars not only require more finance to buy, but they also cost more to insure. Think a small one-litre run-around rather than that sleek BMW or Audi (that can come later).
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- Their driving licence
If your child is still working towards passing their test, they’ll only have a provisional licence. There are some lenders that will offer loans to drivers with provisional licences, but this will limit the pool available to them. They might find it easier to get a loan once they have their full UK driving licence.
Is my child ready to have a car finance agreement?
Your child might be a legal adult – they might even have passed their driving test and be the proud owner of a pink licence – but that doesn’t mean a car finance loan is the best way for them to buy their first car.
Cars don’t come cheap, after all; even used models can set you back a few thousand pounds and that’s a significant amount of debt to take on as a young driver.
It also means that they’ll be entering an agreement that locks them into making a fixed monthly repayment for up to five years. If they’re not financially savvy and run the risk of missing payments, they could end up falling behind and negatively impacting their credit score before they have a chance to really build it.
There are alternatives to car finance that might be worth investigating. Of course, if you’re feeling especially generous and have the funds to do so, you could buy a car outright for your child as a gift. But if that’s not an option for you, then a guarantor loan or joint car finance agreement could offer a good compromise.
Can I take out car finance for my child?
When your son or daughter wants to get on the road in their own set of wheels as soon as possible, it’s natural that you’d want to help. However, applying for car finance in your name when you know your child will be the car’s primary driver is never a good idea, no matter how tempting.
In fact, it’s fraud and could lead to some pretty serious consequences. That’s because car loans are tailored to the individual – their credit history, affordability, and more. If the agreement is tailored to you, but you won’t really be the car’s owner then it’s known as fronting as it’s a higher risk for the lender.
Accommodation deals do exist – that’s the legal way of taking out finance on someone else’s behalf – but they’re extremely rare.
Can I act as a guarantor for my child?
With a guarantor loan, the car finance agreement will be in your child’s name but, if you act as the guarantor, you’ll agree to step in and make the payments on their behalf if they fall behind. Not only does this offer reassurance to the lender – and makes it more likely your child will be approved for a loan – but it also means you can help your child get their payments back on track if the worst does happen.
Can I take out a joint car finance agreement with my child?
Unlike a guarantor loan, a joint car finance agreement would be in both you and your child’s name. That means you’ll be equally responsible for making payments and, crucially, both your credit scores will be at risk if you miss payments.
On the other hand, there’s no requirement with a joint loan that you and your child pay 50% of the monthly repayment each. As long as the lender receives 100% of the amount due, they’ll be satisfied. If you want to help your child buy their first car but also want to encourage them to contribute, you could make the split work for your situation. Perhaps you could contribute 75% and your son or daughter can cover the remaining 25% (as well as the car running costs).
How can I help my child improve their chances of qualifying for a car loan?
One of the biggest barriers to a young driver qualifying for car finance is their lack of credit history. That’s understandable, after all, they can’t start building credit until they turn 18.
So, what can they do to improve their chances?
No loan is guaranteed – and every lender has its own criteria – but there are a few things your child can do to make themselves an attractive candidate for car finance:
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- Improve their credit score
Whether they have little or no credit history, your child can start making moves that could boost their score over time. Steps to take might include registering on the electoral roll, taking out a credit card with a small limit (and paying the full balance every month), and successfully managing a different type of credit agreement like a mobile phone contract.
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- Get a part-time job
Of course, this one depends on your child’s circumstances, but if they can work part-time alongside their studies then this income could help to improve their affordability. If they still live at home with you, then it’s likely that their outgoings are relatively low so most of the money they earn can go towards paying for car finance and running their new wheels.
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- Save a deposit
The more cash your child can put down upfront, the less they’ll need to borrow. It’s a win/win; not only will they improve their likelihood of getting a loan, but their monthly payments could be lower too. If they can save up over a few months – or even a year – to get a good deposit (or you’re willing to give them a helping hand with a cash gift), then putting at least 10% down upfront could make a difference.
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- Use a car finance broker
There are several perks of using a car finance broker. First, it’s important to know that not all brokers are created equally. Make sure you work with one that doesn’t charge any fees; instead, they’ll usually take a commission from the lender, but this should be declared and shouldn’t affect the loans or interest rates your child is offered. You should also work with a broker that has a panel of lenders that can help people with a wide variety of circumstances including young drivers.
