A first car loan with your teenager

The driving test is passed, the summer job has produced $1,500, and your son has found a nine-year-old hatchback for $9,000. He cannot borrow the rest on his own, and you are being asked to make up the difference somehow. There are three ways to do it, and the one you choose teaches him something about money whether you intend it to or not.

Know the whole cost before you choose a car

The purchase price is the smaller part. Adding a 16-year-old to a parent's full-coverage policy costs about $5,740 a year on average in 2026, according to Bankrate, which is roughly $480 a month before fuel, maintenance or a single parking ticket. The figure varies a great deal by state and by car, so get a quote for the specific vehicle before anyone falls in love with it.

Then decide who pays what. A common split is that the parent carries insurance while the teenager is in school and the teenager pays for fuel, and the car itself is financed one of the three ways below. Write the split down with the rest of the terms. Arguments about cars are usually arguments about who agreed to pay for what.

Option one: buy it, and let him pay you back informally

The simplest route is to buy the car outright, keep the title in your name, and ask him to contribute what he can. This is honest about what it is, which is a gift with a chore attached. It is the right answer when the amount is small, when you would not pursue the money anyway, or when the car is really a family car that he happens to drive most.

Its weakness is that it teaches nothing about a payment that falls due on a date. If part of the point is to give him a first loan he can be proud of repaying, make it a loan.

Option two: co-sign a dealer or bank loan

A lender will not extend $7,500 to a 17-year-old with no credit history, and in most states a contract signed by someone under 18 is voidable by the minor, so the loan would be in your name anyway. At 18 he can sign, but a first-time borrower with no file will be quoted near the top of the range. Experian's data for the second quarter of 2026 puts the average used-car rate at 11.19%, running from 6.29% for the strongest borrowers to 21.62% for the weakest. On $7,500 over 36 months, 11.19% costs $1,364 in interest; at 18% it costs $2,250.

Co-signing changes nothing about who the lender will pursue. If he misses a payment it is your credit report that records it, and the lender can collect from you without first trying him. You also have no say in how the loan is serviced and no record of your own. For a first car this is usually the most expensive option and the one with the least control, and it makes most sense only when building his credit history is the main goal and you trust the payments will be made.

Option three: lend him the money yourself

The third route is to be the lender: he puts down his $1,500, you lend the $7,500, and he repays you on a schedule. Done properly it is the cheapest option, it keeps the decision inside the family, and it gives him a real loan with a real record.

Three things make it proper.

Write a promissory note

The note says who is lending to whom, the amount, the rate, the schedule, and what happens when a payment is late. It takes a page. Our guide to what a promissory note must say goes clause by clause.

If he is under 18, remember that he can walk away from the contract and you cannot enforce it against him. That does not make the note pointless. It is still the document that sets expectations, and it is still the record of what was agreed. If he is 18 or older it is an enforceable debt like any other.

Decide the rate with the tax rule in mind

When a parent lends to a child, the tax code's rules on below-market loans apply, with one exception that fits a first car almost exactly: they do not apply on any day when the total you have lent that child is $10,000 or less, as long as the money is not used to buy income-producing assets. A $7,500 car loan at no interest is therefore clean. There is nothing to impute and nothing to report.

If you lend more than that, or if there is another loan to the same child outstanding, charge at least the applicable federal rate, which for loans of three years or less is 4.25% in October 2026. Our guide to family loan interest rates covers what happens above the threshold.

Zero is allowed, but consider charging something anyway. A low rate is what makes a loan feel like a loan, and the difference is small:

• $7,500 over 36 months at 0%: $208.33 a month, no interest
• $7,500 over 36 months at 4.25%: $222.26 a month, $502 of interest over the term

Fourteen dollars a month buys the lesson that borrowed money costs money. Use the loan calculator to try other terms.

Set a schedule he can keep from his own income

The payment should come from his money, not from an allowance that you top up. If he earns $600 a month in term time, $208 is a third of it, which is a stretch; 48 months at $156 may be more honest. A schedule he keeps is worth more than a short one he fails.

Fix the due date to a day after he is paid. Say what happens if he misses one: a reminder, then a conversation, then no car keys until he is current, if that is your rule. Write it into the note's late terms rather than inventing it in the moment.

Title, insurance and the other paperwork

Keep the title in your name until the loan is paid, then sign it over. That is how a bank would do it, it keeps the car out of any dispute, and it means that if the car is sold early the proceeds come to the lender first. Tell the insurer who owns the car and who drives it; a mismatch between title, registration and the policy is the kind of thing that surfaces after an accident. If the title is in your name, the car is on your policy, and the arrangement about who pays the premium belongs in the same written agreement as the loan.

Keep the ledger where both of you can see it

A three-year loan is about 36 payments, and the record of them is the whole point. Date each payment, note the balance after it, and keep it somewhere he can look at it without asking. A shared spreadsheet works. NoteHouse does the same thing with a schedule, a reminder before each due date, and a confirmation step so both of you have agreed that each payment happened, which stops the "I paid you in cash in March" conversation before it starts.

When the last payment clears, sign the title over, mark the note paid, and keep both. He has a paid-off loan on record, even if only within the family, and the next time he borrows it will be from someone who checks.