|Gary Foreman is a former Certified Financial Planner (CFP) who currently writes
about family finances and edits
The Dollar Stretcher website
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I bought a car under my name for my son.
After 4 months of payments, now he says he can't afford it. There are 6 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 score was too low 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
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
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. But, hopefully we can be like the wise man who 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
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. But, there's another, better way to get affordable payments. Find a
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.