Kids and Money: Teaching Your Kids About Loans

It's inevitable that someday in the future your children will need to borrow money to finance a car, college education or a house. How can you teach your kids about loans and the loan process before they reach adulthood?

Perhaps, one of the best ways to teach your kids about loans is to give them one! My husband and I found this to be true when each of our three children wanted to buy their first car. Our feeling was that they didn't really need a car and we certainly were not in a position to buy cars for three teenagers. If they really wanted a car, they had to work for it, so they all held part-time jobs in order to save for a vehicle.

Once they proved they were not spending their money foolishly, my husband and I decided to help them out a bit with their first vehicle purchase. The deal was the same for all three of our teens. They needed to save at least $500.00. We matched their $500.00 and we helped each of them choose a safe, reliable vehicle. We put a limit on how much they could spend and then we lent them the remaining amount needed to purchase the vehicle.

We explained how a real bank would charge interest and expect prompt, monthly payments. The Bank of Mom
and Dad did not charge any interest, but we expected to be paid back in full.

We worked out a payment schedule with each of our teens and printed out coupon books just like a bank would do. There was a coupon for each monthly payment showing the due date and payment amount. This gave them a "real world" feeling of what it would be like to have a loan with a bank. It also taught them to spend their earnings wisely, since they knew that each month they had to make their car payment.

Most of the time our teens did not need to be reminded about their monthly payments and we did not let them slack off on the loans. All three of them paid us back in full and ahead of schedule which gave them a huge sense of accomplishment.

After borrowing from The Bank of Mom and Dad, our teens understood the loan process better. When they became adults and applied for their first loan with a real bank, they were well prepared and had a good idea of what to expect when borrowing money. Unfortunately, the real bank loans came complete with interest!