A car is a very valuable gift. It can change the recipient’s life, offering access to jobs, schools, and other opportunities that would otherwise be out of reach. It can also be a major financial burden, to you and even to the new owner, who may not be prepared for insurance, gas, maintenance, parking fees, and other costs.
When buying a car for someone else, you will need to make a realistic assessment of your own finances, the potential recipient’s needs and capacity, and the potential impact on your relationship with the recipient. You’ll also need to structure the transaction in a way that serves everybody’s interests.
Consider Your Loan Options
Most car purchases are financed by loans, either through the vehicle dealer or through a bank or other lender. You will have to decide whether you want the loan to be in your name, in the recipient’s name, or cosigned.
Keeping the Loan In Your Name
Taking out a loan in your name provides one distinct advantage: it allows you to keep your gift a surprise. A lender will not include the recipient as a signatory to a loan if they aren’t there to sign. If you want the gift to be a surprise and you intend to make all of the payments yourself, keeping the loan in your name is the only choice that will meet your goals.
If you aren’t sure you want to pay the entire loan, this may not be the best choice. It is not easy to transfer a car loan from one person to another. The lender will have to run a credit check on the person assuming the loan and may change the terms. You may need to refinance the loan if you wish to move it to the recipient’s name. This may be difficult if the recipient doesn’t have good credit.
If you don’t plan to make your gift a surprise or you intend to share payment responsibilities with the recipient, you have other options, including cosigning a loan or placing the loan in the recipient’s name.
Cosigning the Loan
Cosigning a loan is a good choice if you’re giving a car to someone who is still establishing their credit, which is often the case when a parent buys a car for a child. You provide the recipient with a vehicle and help them establish their credit history at the same time. If you’re concerned about their ability to make the payments, make a large down payment, which will reduce the monthly payments, or offer to assist with the payments.
Before cosigning any loan, consider the risks. You will be responsible for the loan if the other party can’t pay. Even if they do pay, your debt-to-income ratio will be affected, and that could have an impact on your credit and your ability to get other loans.
Placing the Loan in the Recipient’s Name
Placing the loan in the recipient’s name can work well if you intend to limit your gift to a down payment. The recipient’s credit will have to be good enough to qualify for the loan. If the recipient has poor credit cosigning may be the better choice.
This method of financing helps the recipient build a credit history and limits your risk. You can always help with the payments if you want to, but you won’t be required to cover the loan if it isn’t paid, as a cosigner would be.
You may have to weigh your financing goals against your desire to spring a big surprise when selecting a loan option. Consider the long-term implications for both you and the recipient before making a decision.
Consider How Title and Insurance Options Affect Your Purchase
A car title is a document that establishes ownership of a vehicle. In some states, the title remains with the lender until the car is fully paid for. In other states, the title is in the name of the buyer with the lender listed as a secured party. Once it is issued a title is usually only changed if the vehicle is sold, given away, or fully paid.
You can’t title a vehicle in another person’s name, so if you want the gift to be a surprise, you’ll have to place the title in your name and transfer it later. Ask your state’s Department of Motor Vehicles about the procedure you’ll need to follow. In many states, it is possible to have more than one name on a title, but both people have to sign the papers.
Also, consider insurance. The first thing your lucky loved one will want to do is drive the car, but to do that they’ll need a valid insurance policy that meets your state’s minimum requirements. If the insurance is in your name, be sure it includes the recipient. You may wish to ask several providers for insurance quotes.
Talk to the Recipient
A car is an amazing surprise and the idea of a car as a surprise gift is appealing. In most cases, though, both you and the recipient will be better off if you discuss the gift first.
- Be sure the person is willing to accept a gift of this size from you. Some people may be too proud or too humble to agree or may be concerned about what they think you might expect from them in return.
- A frank conversation will help you to decide whether the person really needs a car, how it will make a difference in their life, and whether they can afford the associated costs.
- Assess the costs of car ownership realistically, including gas, maintenance, parking, and insurance.
- Discuss the type and size of the car that will serve the individual best. Consider family needs, fuel economy, safety, and personal preferences. The recipient may need your help with this choice, especially if this will be their first car.
Discussing your gift with the intended recipient might ruin the element of surprise, but you’ll have a better opportunity to work out the best choice of vehicle and financing for both of you. It may be worth asking if using the money another way might help them more.
Consider the Recipient’s Needs–and Your Own
A car is a wonderful thing to have, but it’s also a significant responsibility and a significant expense. The intended recipient of your gift may not be in a position to pay for gas, insurance, maintenance, and the other expenses that go along with car ownership.
Consider whether the intended recipient wants a car or needs one, and if so what type of car they need. Have they talked about needing a car, or mentioned any cars that they’d like? You’ll want to base your choice of vehicle on the nature of the need: the right car for a married couple with kids may not be right for a single person with a long daily commute!
You’ll also need to consider your own finances. How much can you afford to spend? Be realistic and consider the possibility of unexpected emergencies that could affect your financial capacity. You may be required to pay a gift tax on the car, so consider that as well.
Before you commit to such a large gift, it’s worth taking a moment to consider your own motives. You’re about to spend a great deal of money. That’s not necessarily a bad thing, but you need to be clear on why you’re giving this gift and what the potential risks might be
The Bottom Line
A car can be a valuable and very welcome gift. It also creates responsibilities and costs for the recipient. Careful consideration of what you can afford, what the recipient wants and needs, and what will be the most effective way to set up the transaction can help you make sure that your gift keeps both you and the recipient happy and satisfied.
