Can You Get a Car Loan Under 18? How It Works

Financing a vehicle involves specific legal and financial considerations, particularly for those under the age of 18. Understanding these complexities can help aspiring car owners navigate this process effectively.

Legal Age Requirements for Contracts

Securing a car loan requires contractual capacity, which refers to the legal ability to enter into a binding agreement. In nearly all jurisdictions, individuals must be at least 18 years old to establish such an agreement. Lenders cannot hold minors legally responsible for the terms of a contract because they are generally considered to lack the full understanding and maturity to undertake such obligations. This protection safeguards minors from potentially exploitative situations or financial burdens they may not fully grasp. Consequently, obtaining a car loan solely in an individual’s name before turning 18 is not possible.

Alternative Ways to Finance a Car

Since minors cannot enter direct loan agreements, alternative methods are necessary for those under 18 to finance a car. A common approach involves an adult, often a parent or guardian.

Co-signing a Loan

When an adult acts as a co-signer, they agree to share legal responsibility for the loan with the primary borrower. This arrangement provides lenders with additional security, as the co-signer’s creditworthiness and income are considered in the loan approval process. The co-signer becomes equally liable for repaying the debt if the primary borrower fails to make payments. Any missed payments or defaults will negatively impact both the primary borrower’s and the co-signer’s credit history.

Adult as Sole Borrower

Another option is for a parent or guardian to take out the car loan exclusively in their name. In this scenario, the adult is the sole borrower and legal owner of the vehicle, even if the minor intends to make the regular payments. The loan’s terms, including the interest rate, will be based entirely on the adult’s credit profile and financial standing. This arrangement places full financial and legal responsibility on the adult, who would face all consequences if payments are not made.

Legal Emancipation

A path involves legal emancipation. An emancipated minor is legally recognized as an adult and gains the capacity to enter into binding contracts, including loan agreements. However, while emancipation grants this legal right, it does not guarantee loan approval. Lenders still assess creditworthiness, and emancipated minors often lack the established credit history necessary to qualify for favorable loan terms independently.

Considerations for Young Car Buyers

Acquiring a car involves ongoing financial responsibilities that young buyers should carefully consider. Understanding these costs beyond the initial purchase is essential for sustainable car ownership.

Making a Down Payment

Making a down payment can significantly benefit a car purchase. A larger down payment reduces the overall loan amount, which in turn lowers monthly payments and the total interest paid over the life of the loan. It also demonstrates financial responsibility to lenders, potentially leading to more favorable loan terms. Experts often recommend a down payment of at least 10% to 20% of the vehicle’s value.

Budgeting for Ongoing Costs

Budgeting for all car-related expenses is crucial, as the loan payment is only one component of vehicle ownership. Additional costs include:
Vehicle insurance
Fuel
Routine maintenance
Registration fees

Insurance premiums for young drivers can be considerably higher due to their limited driving experience. Annual expenses for fuel and maintenance can vary widely based on the vehicle type and driving habits. Financial advisors suggest allocating approximately 10% to 15% of monthly income to cover all transportation costs.

Building Credit History

Building a positive credit history is important for young individuals, even if not directly for their first car loan. A strong credit profile can lead to better interest rates on future loans and financial products. Young people can begin establishing credit by:
Becoming an authorized user on a parent’s credit card, provided the parent manages the account responsibly.
Obtaining a secured credit card, which requires a cash deposit as collateral.

Consistently making on-time payments for any credit obligation is the most impactful way to build a favorable credit score.