How Car Loans for Teens Work

How Do Car Loans for Teens Work?

Most states don't allow minors to sign legal contracts, which generally means a teen can't buy a car on their own using an auto loan. If they want to purchase a vehicle with a loan, a parent or guardian will have to help them with the buying process.

There are a few key considerations to keep in mind when getting a car loan for a teen, such as:

Cosigner

Because minors can't enter into a legal contract, auto lenders can't enforce the terms of such a contract until the teen reaches the age of majority, which is 18 years old in most states. Consequently, most lenders don't issue car loans to minors, and those that do usually require an adult cosigner.

Cosigning on a loan for your teen means you're legally responsible for the loan. Even if your teen agrees to handle the payments, any missed or late payments could lead to repossession of the car and could damage your credit.

Learn more: How Cosigning an Auto Loan Affects Credit

Credit Score

An applicant's credit is one of the main factors lenders consider when approving a car loan. Since most teens have little or no credit history, they often have a hard time qualifying for a loan on their own. They'll usually need a cosigner with a good credit score for an auto loan—typically 661 or higher.

Interest Rates

Just as a cosigner's credit history can help a teen qualify for a car loan, it can also improve the car loan's interest rate. Generally, the higher the cosigner's score, the better the odds of approval and securing favorable terms. Lenders also consider other factors when setting an auto loan's rate, such as the loan amount, down payment, vehicle age and repayment term.

Insurance

Most states don't allow under-age teens to enter into legal contracts, which means they generally can't get auto insurance on their own. Perhaps the best way to insure a teen driver is for parents to add them to their existing policy. Unfortunately, this can be costly because insurers consider teens to be higher-risk drivers based on accident statistics.

The Costs of Car Loans for Teens

Whether you're taking out a car loan yourself or cosigning with your teen, there are a few costs of car ownership you and your teen must consider before proceeding. While they go beyond the loan itself, they're important for budgeting car ownership.

• License and registration fees: When you buy a car, you'll have to pay upfront taxes and an annual registration fee. Annual taxes and fees average nearly $700 a year nationwide, according to AAA.
• Insurance: Car insurance is often the biggest ongoing expense for teen drivers. According to 2025 Experian data, adding a teen to your policy costs an average of $3,512 a year, or $293 a month. However, prices can vary depending on your location, the insurance company and your teen's driving history. That's why it's a good idea to compare insurance rates to find the best deal.
• Gas: Teens drive an annual average of 635 miles per month, according to the Federal Highway Administration. To assess how much to budget for gas, determine how many miles your teen will drive, your car's fuel efficiency and the average cost of gas in your area. For example, if your teen drives 635 miles a month and the car gets 20 miles per gallon, you'd spend about $111 a month on gas at $3.50 per gallon.
• Maintenance and repairs: AAA reports the average cost to maintain a car is roughly $800 per year, including oil changes, tire rotations and new air filters. Teens should learn to budget for maintenance and even set aside money in an emergency fund for unexpected repairs.

How to Choose a Car Loan for a Teen

Most lenders don't offer car loans directly to teens, and the few that do typically require a cosigner. That means a parent or guardian will usually need to take out the loan themselves or apply with their teen. Here are a few practical tips to keep in mind when financing a car for your teen:

• Determine a budget. This is a good opportunity to teach your teen how to budget. Start by calculating how much you and your teen (if they're contributing) can afford to pay each month. Experian's car payment calculator can help estimate monthly payments for different vehicle amounts.
• Prioritize safety features. Since new drivers are still gaining experience recognizing hazards, it's a good idea to look for cars with premium safety features like electronic stability control, automatic emergency braking and blind spot monitoring. Talk to your insurer about what safety features qualify for discounts to help you save money on your premiums.
• Consider high-quality used cars. No parent wants to put their teen behind the wheel of an unreliable car that could break down and leave them stranded. But a good used car can be a more budget-friendly option and still be safe and reliable. They typically cost less to buy, which means your loan will be smaller. And since insurance is usually cheaper for used vehicles, you could save money there too.
• Approach buy-here-pay-here dealers with caution. You may come across a dealer offering in-house financing called buy here, pay here (BHPH) for those struggling to secure an auto loan. Be aware, this type of financing often comes with excessive interest rates that can exceed 20%, numerous fees and other drawbacks.

Frequently Asked Questions

Get Your Credit in Good Shape Before Applying for a Car Loan

Getting a car loan for a teen can be tricky. Whether you take out a car loan yourself or cosign on one with your teen, good credit can help you qualify for the loan and secure more favorable terms.

Before applying, it's a good idea to get a clearer picture of your credit profile. Check your Experian credit report and FICO^® Score^☉ for free to see what lenders will see when reviewing your loan application. Take steps to resolve any issues you find and improve your credit quickly so you'll be in a stronger position when you apply.