It’s an exciting time when your daughter can get their licence and think about getting their first car. Its one of the first steps on their way to independence and giving you both a bit of freedom.
Although your daughter can apply for their provisional licence from the age of fifteen and nine months, if they want to take out finance in their name they need to be 18. So, if they are under 18 or have no credit history you might be thinking about whether you can take the finance out for them.
The short answer is yes, you can, but you need to think about a number of factors. We can walk you through those factors and how to best to approach the financing journey.
Working out if you're ready to get finance
Despite wanting to support your daughter’s blossoming independence you’ll also need to think about whether you're in a financial position to finance a car for her.
All lenders will carry out a credit check when you apply for finance so it’s worth checking your credit score and seeing how you could improve it, if at all, to make sure your application will be viewed as favourably as possible.
Lenders will also carry out a financial review to prove this is affordable for you to undertake on her behalf. They'll use a budget and expenditure form to show your readiness to take on the loan. There're lots of examples online and its worth downloading one and being ruthlessly honest about your affordability before you start applying to lenders.
Depending on your circumstances, you should also think about the cost of insurance, given the often-prohibitive costs of insuring a young driver. And give some thinking to petrol and maintenance in any budget.
Factors influencing the decision
The finance provider will view an application for credit on behalf of someone else as higher risk. The provider assumes the person applying for finance is the owner and main driver. If you are not the main driver, they may be reluctant to lend.
If your daughter’s application has been declined already, the lender may be unwilling to lend to someone else at the same address. This is because they will be wary of an accommodation deal where your daughter has the vehicle, but you're responsible for the debt, which increases the risk for the lender.
Its worth pointing out here that taking finance out on behalf of anyone else – even your daughter – without declaring it, is an act of fraud, on both of your parts, so its important to be upfront about your application.
Benefits and considerations
You’ll need to consider which lender will allow you to take out finance on behalf of your daughter and out of those lenders who is most closely aligned to your circumstances, so you aren’t making multiple applications.
You’ll also need to think about whether taking out finance on behalf of your daughter could put a strain on your own finances and make it difficult to keep up with your regular bill payments. If there’s a chance that is the case, its not the best move.
On the other hand, if you have a sizable emergency fund with little or no debt, and you’re still getting a regular salary, a loan might not be as difficult to absorb into your monthly expenses.
If you’ve done your homework and realise the finance is too much of a risk, you can give your daughter help and pointers to turbo boost their savings to help them buy a car outright or pay a bigger deposit, making the loan manageable for you.
Depending what kind of loan you choose, you may both be equally responsible for the debt. That means that if the other person defaults on payments, the finance company could hold you responsible for payment.
There are a number of products available that will allow you to take out a finance agreement in your name but have a different name on the V5 certificate. Let’s have a look at the main types of options for finance for your daughter.
Guarantor finance
A guarantor loan is one that your daughter would take out on the express agreement from the finance company that in the event of her not being able to pay you would take over the repayments. In this way you are reducing the risk to the lender and improving her chances of being accepted.
By doing this, your daughter’s own credit profile will improve if she shows an ability to repay the finance on time and in full.
However, the decision to be a guarantor is not one you should take on lightly. You need to be sure you can repay the loan if they can no longer pay. Both the borrower and the guarantor can face legal action and significant damage to their credit scores if they default on the loan.
Joint applications
A joint application is another option for you to consider. In this product both your financial circumstances and your daughter’s are considered equally.
If your daughter has little credit history or a low score, a joint application may be worth thinking about. However, if your daughter misses a payment, it will be recorded on both your credit files. This is because of a legal term called joint and several liability. You should only think about this option if you have the confidence that she can repay the loan.
A better option may be if your daughter has an acceptable credit rating that would allow her to take finance out in her name, that you help her with the repayments. This will help her credit history, without you taking on the risk.
Identify the lenders that offer the finance types that allow you to take out finance on someone else’s behalf.
Use their online finance calculators to test different terms and deposits.
Get an eligibility quote via a soft search across those lenders that look most likely to offer you a suitable APR.
Importance of getting multiple quotes
Most lenders will offer an eligibility quote via a soft search, which won’t leave a mark on your credit file, so you can do some thorough research comparing APRs. You can do all this legwork before you progress to a full application.
Remember: progressing to a full application and not taking that credit but making a full application with another lender will impact your score.
The quote you get will be determined by several factors.
Firstly, your own credit score, and that of your daughter, if you are considering a joint application. Check your credit file and make sure there are no errors or omissions.
The size of the deposit will have an impact on the APR you are offered, so think about how much you are able to put upfront.
For the loan term you should think about the term length and sustaining those payments five or even seven years down the line. Although it's often tempting to roll the loan out over a longer period, this will have a significant impact on the total cost of the loan.
