For Parents

How to Teach Your Kids About Car Loans

Auto loans can be tricky even for adults to figure out! Here’s how to break it down for the kiddos.


Ever wondered how to prepare your kids for the financial world? It’s never too early to start, and understanding car loans is a great place to begin.

In this guide, you’ll learn how to explain the basics, break down financials, and teach them when it’s the right time to get a car loan.

We’ll also highlight potential pitfalls and show you how to set a good example.

Let’s empower our kids with financial knowledge!

Teaching Your Kids the Basics of Car Loans

You’re now ready to dive into the basics of car loans with your kids. It’s essential they understand this common financial responsibility from an early age.

Start by explaining that a car loan is borrowed money used to pay for a car. This loan must be paid back over time, with an extra cost called ‘interest.’ You can liken this to borrowing a toy from a friend but having to give back the toy plus one more as a thank you.

Next, let them know that not everyone is given the same interest rate. It’s usually determined by a person’s credit score, which is like a report card for how well they handle money. If they don’t pay their bills on time, their score goes down, and their interest rate could go up.

Also, make sure they understand that car loans aren’t free money. If they don’t pay it back, the car can be taken away, a process known as repossession.

Breaking Down the Financials of a Car Loan and What They Mean

Now, let’s break down the financial aspects of a car loan and explain what they mean, so you can effectively teach your children about this important aspect of personal finance.

  1. Principal: This is the actual amount of money borrowed to buy the car. It’s important for your kids to understand that the cost of the car isn’t just the sticker price, but also includes interest over time.
  2. Interest: This is the cost of borrowing money, usually expressed as a percentage of the principal. Over the life of the loan, you’ll end up paying more than the original amount borrowed due to interest. Whenever you can, explain to your kids that it’s best to secure a loan with a lower interest rate.
  3. Term: This is the length of time you have to repay the loan. The longer the term, the more interest you’ll pay overall. Teach your kids that while longer terms might offer lower monthly payments, they’ll ultimately cost more.

When to Get a Car Loan

Let’s dive into figuring out the best time for you to take out a car loan. It’s not a decision to be taken lightly, and timing is key. Remember, rushing into a loan can lead to high interest rates, unaffordable monthly payments, and financial strain.

A good time to consider a loan is when you’ve saved enough for a significant down payment. This reduces the amount you’ll need to borrow and ultimately pay back. It’s also smart to apply when your credit score is strong. Lenders are more likely to give you a favorable interest rate, which can save you thousands over the life of the loan.

Consider if you’re in a stable financial situation. Do you have a secure job with a steady income? If you’re unsure about your future finances, it might be best to hold off.

Lastly, keep an eye on the market. Interest rates fluctuate, and sometimes, waiting a bit can mean securing a lower rate. So, don’t rush. Take your time, evaluate all these factors, and when everything aligns, that’s the best time to get that car loan.

What to Watch Out For With Car Loans

When dealing with car loans, you’ve got to understand the two-faced nature of interest rates and dealer incentives, but also keep an eye on hidden fees and charges. You see, while low interest rates and hefty dealer incentives can seem like a great deal, they may not always be as they appear.

Consider this:

  1. Interest Rates: They can be tricky. Dealers may offer a low interest rate, but it might only apply for a short period or come with higher monthly payments.
  2. Dealer Incentives: Dealers often use incentives to attract buyers. However, these can come with strings attached, like a higher price for the car or a requirement to finance through the dealer, which can have higher rates.
  3. Hidden Fees: Always read the fine print. There might be hidden fees, such as early payoff penalties or mandatory insurance, which can significantly increase the cost of the loan.

How You Can Set a Good Example as a Parent

Undoubtedly, you’re setting a strong example for your children whenever you handle your car loans responsibly. It’s not just about making payments on time, though that’s important. It’s also about the way you approach the whole process.

You can start by involving your kids when you’re researching and comparing different car loans. Explain to them why you’re choosing one loan over another. Make sure they understand that it’s not just about finding the lowest monthly payment, but also considering the interest rate, the length of the loan, and the total cost of the car, including the loan.

Also, show them the importance of saving and budgeting. If you save money for a down payment, explain why it’s beneficial. When you budget for your monthly car payment, let them see how you ensure it fits within your other financial commitments.

Lastly, demonstrate financial discipline. Resist the temptation to buy a more expensive car than you can afford just because you can get a loan for it. By living within your means and prioritizing needs over wants, you’re teaching your children valuable lessons about financial responsibility.


Teaching your kids about car loans is crucial. Did you know that auto loan debt in the U.S. reached over $1.37 trillion in 2021? With such high stakes, it’s critical to start educating them early.

By understanding car loans, they’ll make smarter financial decisions. And remember, you’re their first role model; let’s show them how to navigate financial waters wisely.

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About the Author

David McCurrach

David McCurrach is the founder of Kids' Money. Following a career working in finance for several banks and credit unions, David started Kids' Money in 1995 and has since published three books on kids' financial literacy and allowance programs.

Last updated on: October 3, 2023