Children are incredibly observant; even when you think they are not paying attention. It is very likely that they will overhear you discussing financial issues. At any age, it is a good idea to explain purchasing power, credit, and loans. A good place to start is with an auto loan and the interest rates associated with it. Of course, it is important to tailor your talk to the age and comprehension of the individual child. The conversation could go something like this.
"Let’s talk about money. You know mom and dad work and then our bosses pay us for what we do. That is called a salary. From that money, we need to pay for things like food, clothes, and toys."At this point, you can engage the child by asking them what else you buy on a regular basis. Then you can talk about special purchases like school supplies.
"When we buy a car, it costs thousands of dollars. Since we don’t have that much in savings, we work with a company that will let us borrow the money. They are willing to give me the money because they know we will pay it back. Now they don’t expect it back all at once, but we can pay it off a little bit each month. But for the convenience of paying it back in installments, we have to pay something extra. That is called interest."Take a breath and see if they understand. If not re-explain it using other words or other examples.
"Let’s talk a little more about these companies and people who loan money. Just like mom and dad work and get paid, the companies that loan money wants to be paid too. So part of that interest is so that the lending company has enough money to keep loaning out funds to us and to lots of other people who want to buy cars. When you see ads about cars, you will hear them talk about interest rates. That is the amount of money you have to pay over and above what it cost for the car. These interest rates will be different from different lenders. To get the best price, mom and dad talk to different companies to see who will lend us the money at the lowest interest rate."Ask for more questions and leave the subject alone.
When the monthly statement comes in or the next time you run into an ad, you can bring the subject up again to be sure your child understands what auto loans and interest rates are all about.
Teenagers are a different subject. They should already understand the principle of debt but may not fully realize how auto loan rates work. For them, you will need a more detailed explanation. Since they will be driving soon, it is a good segue to discuss the basic costs of a vehicle including purchase price, interest on the loan, insurance, repairs, and fuel.
Beginning the discussion and maintaining their attention may be difficult, but some of the areas you might want to broach would include:
When it is and is not a good idea to get a loan. For instance, there are some things that you might never be able to afford without financings like a house or a vehicle. Then you need to talk about what would be a good deal and what is not. Address interest rates and how they can vary from one lender to another. Talk about how to figure out of interest rates will be going down and if the purchase can be delayed how it can save them a lot of money over time. There are a lot of television shows and movies that involve people who have gotten into significant debt. Student debt is a hot topic and you can explain how it is good to get loans if you graduate and are able to command a salary to cover expenses and loan repayment. However, if the child leaves school, repayment could become a burden they will never overcome.
As they take driving lessons and you consider buying another vehicle, include them in the discussion about how much it will cost and where to find applicable loans. It is also a good time to talk about reasonable purchases, overspending, credit cards, and saving.
Kids love computers. Have them sit with you while you research lenders. Many of the sites have imbedded programs that will let you insert loan amounts and will let you calculate the amount of interest, monthly payments, length of the loan and how the repayment amounts vary with different terms, interest rates, and other factors. With luck, they will explore on their own and start to understand what is involved.
Another suggestion would be to talk with your school administrator about incorporating practical issues into the curriculum. If the facility has classes in business or life issues like budgeting, see if they can incorporate auto loan rates, spending habits, and financial responsibilities. Family planning classes could also have at least a short segment about proper transportation safety and how to deal with loans.
The bottom line is don’t avoid the subject. Pop-up ads can make it sound enticing and easy to lure young adults into a situation that will leave them financially strapped for some time to come. Without your discussions, you will let someone else educate your children and that could easily lead to poor decisions.
We live in a world of immediacy and that includes instant gratification. Although it is extremely unpopular, part of parental responsibility is to help your offspring understand delaying purchases or other unwarranted spending in order to be financially stable.
It is equally difficult for a parent to allow the child some mistakes on their own. It often happens that parents control all the spending. Allowing some financial choices could help your children as they move into the adult world.
It is certainly not an easy topic to deal with but with some forethought and luck, you will help your children understand the principals of interest rates and borrowing.