When you think of teaching money lessons for teens, you probably don't think of dragging them through the car-buying process. But that's exactly what I did.
I'm not talking about taking The Boy down to the car dealer and showing him how to negotiate. We did that with the first car we got him. No, I actually took my son to a credit union and non-traditional lender. So he could watch me be rejected for a small amount of financing. I also walked him through what I'd done to create a situation where I didn't need that financing anyway.
But I'm getting ahead of myself. This a long-ass “x things” article, dammit.
So, before we get too far in, here are the money lessons my teen son learned during our last car-buying adventure.
1. Research is Essential to Making a Big Purchase
One of the first best money lessons for teens is the importance of research. Before making a purchase, it's a good idea to take a step back and find out about the pros and cons.
My son has been researching his purchases with a greater interest in recent years, mainly because he's at an age where he wants things that are a little more expensive. It's one thing to risk $10 on a toy that you end up bored with and quite another to spend $90 on a cheap 3D printer that breaks after three days.
At any rate, my son came to me and hoped we could get him another car. It's something I was planning on a few months from now, but this movement of the time table changed things for me a bit. First of all, I had been setting aside money for the purchase, and I was tempted to tell him to wait another five months.
But then he told me that he's been doing research and discovered that the end of the month and the end of the year were good times to buy cars because you could find better deals a lot of the time. It was hard not to swoon.
We'd previously talked about replacing his 22-year-old car with a newer model — and I'd made it clear that this would be the last car I bought for him. He'd be on the hook for the next one. I also put a price limit on the car. A reasonable price limit, but a price limit nonetheless.
So, he went in knowing that he needed a car that would likely last him through college and he wanted better gas mileage. He did some research on cars in the price range I gave him and told me he wanted a Smart Car.
However, before settling on that, I told him that maybe we should do some test-driving. Dude is more than six feet tall and probably not done growing. There weren't Smart Cars on the lots here in town, but he did a search and found a few Mini Coopers. He figured that if the Mini Cooper was too small, a Smart Car would be out of the running. After driving one Mini Cooper, the Smart Car idea was abandoned.
We spent most of one weekend test-driving a ton of different cars. It gave my son a feel for how they handled and what he was comfortable with.
In the end, after doing a lot of research, and almost buying a zippy, cool car with a low reliability rating, my son on his own, selected a Honda Accord. “It's a better deal for the money,” he said. “And it's more reliable. I can give up some horsepower for a car that will last longer and probably won't cost as much in repairs.”
I almost cried with happiness.
2. A Loan Can Mean Better Cash Flow
So this lesson was a little weird. Because I hadn't planned on buying a car for another five months, I was reluctant to just slap down all the money at once. I have the assets to make it happen. But I also like to have a buffer. And I can find other uses for the money than putting it into a car. We talked about putting half down (it's better to borrow less) and borrowing the other half.
I planned on getting a three-year loan but paying it off in five months. We did a few exercises, talking about savings and interest rates and the impact of debt on finances. I also talked about trade-offs. I encouraged him to think about debt and weighing instant gratification with long-term costs.
Because I use investing to meet a lot of my goals, I told him I was comfortable taking a small amount of debt for a short period of time in order to keep more capital in my investments, earning a higher rate of return.
It's not the choice everyone makes. And, for me, the calculation also depends on the car's cost, age, and value. I was willing to finance a new car with a 1.9% interest rate and keep the loan for five years. I knew the car would last a long time (it was paid off several years ago and is still going strong). Plus, the money's done way more in the market than it would have done sunk into a depreciating car.
But with this other car? I took a different approach. Smaller loan, paid off quicker. Designed to keep me mostly in line with my previous plan without straining.
In the end, it didn't matter. But my son and I had a good talk about important financial concepts.
3. Let's Talk About Dealer Financing
At one dealership, we weren't even allowed to test drive a car until we'd been pre-approved for a car. While we sat there waiting for the results, I explained the difference between a hard and soft inquiry. I also told my son that, even though this would be a hard inquiry, as long as we looked like we were shopping for an auto loan, all the credit pulls for the next couple of weeks would only “count” as one inquiry.
According to FICO, a hard inquiry can amount to a reduction of about five points in your score. If you end up getting five or six, that can make you nervous. Having rate shopping lumped into one inquiry can provide peace of mind.
The salesperson returned. I passed the “test.” With that out of the way, my son got a front-row seat to the “How much do you want to spend each month?” conversation. It's everyone's favorite car-buying conversation. I told the salesperson how much I wanted to spend total, refusing to engage in that stupid conversation. After they realized I wouldn't give them the pleasure of a monthly number, they asked what I had for a down payment.
More car-selling tricks
Next, the salesperson showed us a car they said was right in our range. The Boy drove it. When we got back, they showed us a potential deal. Rather than taking my final price as my final price, they treated it like I would borrow that amount on top of the down payment.
My son was annoyed that they had tried to trick us and even he looked at the rate they offered in disdain. So we talked about the pros and cons of dealer financing.
On one hand, dealer financing can be easy to get. But you might pay for it with a higher interest rate. I explained that dealer financing specials on new cars are often different. That's how I ended up with a 1.9% rate on my Subaru. But for a used car? Sometimes the deal isn't so good.
Upon returning home to regroup, The Boy retrieved some of his homemade rocket fuel and used it to burn the deal sheet in dramatic fashion.
What if a dealer doesn't offer financing?
After much trouble, we found the Accord. However, the car dealer we chose didn't offer financing. As a result, we had to apply for financing. They work with two credit unions in town, so we filled out paperwork. Yes, real paperwork that required me to list out my credit cards using a pen. Then they faxed (faxed!) the information to the credit unions. But since it was Saturday, no one would look at our application until Monday.
We talked about the fact that this was inconvenient, sure, but the interest costs would probably be lower. In the meantime, I'd make sure I transferred money into an account where I could access cash for the down payment and we'd just sit tight until Monday.
4. Credit Scoring and Lending Decisions are Kinda Arbitrary
When you share money lessons for teens, there's a good chance you talk to them about credit, helping them answer these questions:
- What's good credit?
- How do you build a credit history responsibly?
- Is it possible to build credit and avoid getting over your head in debt?
- How can credit help you meet your goals?
I dragged my kid to all the financing meetings. Normally, you wouldn't take your kid to the bank to talk about your loan prospects. Not me. He's getting this car, he has to suffer right alongside me.
But what a fun adventure it was!
Because I'm self-employed, I showed up to the credit union with three months' worth of bank statements and two years' worth of tax returns. They were happy with my income and reasonably pleased with my credit score.
As I'd explained to my son, I'd closed an account with a large limit in recent months and opened some new accounts because I'm repositioning my credit card rewards plan. It impacted my credit score, but it shouldn't have been enough to prevent getting a relatively small loan.
Red flags and self-employed income
What caught their attention, though, was a botched attempt at getting rid of some past debt from my marriage. Yes, even personal finance experts make mistakes. We do stupid shit all the time. After screwing up a debt consolidation move, I was sued and a judgment entered against me. I'll write about sometime soon. It's a fun story.
At any rate, even though my income and credit score were acceptable, this was a “red flag” for the credit union. They tried to get me to take a loan against my Subaru to pay off this debt that I was already paying on as agreed.
No, thank you.
So we trundled over to the alternative financing place. Not a payday lender *shudder*. One of those places that do second-chance financing at a reasonable rate.
Anyway, their version of my credit didn't show that stupid-ass red flag. In fact, my son looked on in confusion when he saw that the credit score used by the financing place was almost 80 points higher than the score the credit union used.
The problem at the financing place was that they wouldn't use my bank statements or K-1s or P&L or any other thing to verify my income. They would only accept my Schedule C. And most of my income isn't reflected on my Schedule C.
Especially not for 2018 when I had a W-2 and had cut my freelance work in half.
In the end, I was rejected there, too.
What's going on?
My son was flabbergasted. How could credit scores vary so widely? And with my income and the fact that I already had the money, how come I couldn't get a loan for $3,500?
So we had a talk about how information isn't uniformly reported to credit bureaus and that sometimes lenders use their own version of credit scores. We also talked about how lending decisions are based on perceived risk. Trying to figure out your “real” credit score, and understanding where you're at can be rough. And, even if you think you're a good bet, the algorithm might say different.
At both places, the representatives we talked to were visibly frustrated. They thought it made sense to make the loan. But the computers just weren't having it.
I'd warned him that I might have trouble getting a loan, but he was still gobsmacked by the reality of the situation. Sitting through those financing meetings and seeing how different places value different information was an eye-opener. Especially the credit scoring. The disparity shocked him.
How could a credit decision be based on something that could vary by almost 80 points, depending on which bureau a lender is using?
5. Nothing Beats Financial Preparation
The most important of the money lessons for teens? Nothing beats financial preparation. It's true that I couldn't get this small-ish loan. But we got the car anyway. Why? Because I had the money. I had enough in ready cash to make a down payment of $3,000.
In addition to that, I have assets in my long-term emergency fund and in my travel fund (both in taxable investment accounts) to tap into. We talked to the car dealer, and they said they'd be willing to hold the car for us with the money down and wait a few days until I liquidated some of my equities.
Was I excited about using some of that money for the car? Not really. But it was there. I took it from the travel fund and devised a plan to replace it in the next three months by making extra “payments” into the account.
We talked about how, if I'd known I'd be looking for financing, I would have done some things differently to protect my credit. Additionally, we talked about how setting money aside regularly to help meet various goals is a smart move that can help you be ready for anything.
In the end, we're privileged that I can make good money. We're lucky that I'm in a position to be able to shift things around and get cash when needed. And it's a good thing that I'm prepared ahead of time for these types of situations.
Money Lessons for Teens: How Much Can You Do Yourself?
In the end, I encourage my son to be involved in his financial decisions and do a lot of thinking and research. He's responsible for paying for his gas and contributed some money to the purchase of the car. Additionally, he knows that if he loses the insurance good student discount, he has to pay the difference.
Additionally, after going through this with me, he sees that you can't always just get a loan. You might have to rely on yourself and your savings in a tight spot. While this doesn't address the issue of low wages and other systemic problems, our adventure has shown The Boy that he needs to take steps to protect himself and plan for the future.
In fact, he's looking ahead right now. He's thinking of the money from his job at a restaurant, what he gets from relatives for the holidays, and what he can earn other ways to not only save up for something specific but to also have a buffer for things that just pop up.
It was a weird and stressful few days, but my son learned a lot. And I hope it sticks.