Selling car to family member via "loan"

[Jacques Roland]

What is the name of your state? Massachusetts

I would like to provide a car for one of my family members to drive and use as their own, but I would also like to able to potentially recover a portion of my "investment" should things go awry, i.e. family member is unable or refuses to pay me back. I understand never to mix family with business, and I totally understand and am willing to accept a "total loss" on my car purchase if push comes to shove. Nevertheless I am not in the spirit of just giving away expensive things for "free" and would like to keep the semblance of responsibility for as long as possible (family members pays me "monthly payments" to pay back the cost of the car purchase). My other goal is to minimize my own liability/risk so I do not have to insure the vehicle or be responsible if my family member gets in a car crash, etc.

That being said, is the following scenario legally possible? Do I need a lawyer to draft a loan/purchase contract?

1. I find a vehicle and purchase it in cash. No lien, no loan. Vehicle is initially registered and insured in my name.
2. I decide to "sell" the vehicle to my family member. To finance the vehicle from me, I offer to "loan" them the money. They agree to make monthly payments until the vehicle is paid off.
3. Family member is now the "owner" of the vehicle after the purchase sale. Vehicle is registered in their name and in their insurance.
4. I am the "lien holder" ? In case of non-payment, I am technically legally allowed to attempt to recover the vehicle (enforceable by a smalls claims court?).
5. Does the car insurance company need to know about this situation at all?
6. I am fully aware I am still at risk of losing my initial investment (the purchase of the car). Family member might die, refuse to pay back, or court could somehow deem the agreement not enforceable when I try to collect (which hopefully never happens). But I still want a way to recoup my investment rather than just "give the car away."

The simpler alternative is just to gift the car to my family member and hope they send me monthly payments in good faith...

 

[Zigner]

Is your scenario possible? Yes.

Does the insurance company need to know about the situation? Yes, in that they will be advised that there is a lienholder. Your contract should also require them to maintain additional insurance beyond the minimum liability insurance that the state requires so that your interest in the vehicle is protected in the event that the vehicle is damaged or destroyed.

Do you need a lawyer to draft a loan/purchase contract? No (but see the next question).

Would consulting with an attorney about the loan contract be extremely wise? Yes.


You should also study up on the duties of a lienholder when repossessing a vehicle.

 

[zddoodah]

Your frequent use of quotation marks is confusing since that usually means you're not using the words in their customarily understood sense.

You certainly may buy a car (free and clear) and then transfer that car to someone else with an agreement for that person to make payments to you and secured by a lien. If you do this correctly, you would be able to repossess the vehicle in the event of non-payment. The auto insurance that the transferee obtains will want to know that there is a lien against the vehicle's title, and you should insist on evidence that you are named as a loss payee on the insurance.

I would estimate that the average person would need legal assistance to set this up correctly, so I suggest you seek the advice of an attorney.

If that doesn't answer your question(s), please feel free to follow up.

 

[Bali Hai Again]

A car is not an “investment” unless a classic that appreciates in value over time if taken care of. Even then you will need to find a buyer. Your car is a consumable like a loaf of bread or a gallon of milk and will depreciate in value over time until ready for the scrap yard. If your family member is aware that you don’t care if you are paid back I almost guarantee what will eventually happen.

 

[Jacques Roland]

Thank you Zigner and zddoddah for your helpful responses.

> You certainly may buy a car (free and clear) and then transfer that car to someone else with an agreement for that person to make payments to you and secured by a lien

Could this be written in a single purchase agreement contract, or would I need to make 2 separate contracts (one for the sales agreement, and another for the loan/lien holding) ?

 

[adjusterjack]

You can combine the purchase and financing agreement into one document.

There are many sample documents on the internet.

car purchase and finance agreement at DuckDuckGo

You can modify and simplify any of them.

 

[Taxing Matters]

What is the name of your state? Massachusetts

I would like to provide a car for one of my family members to drive and use as their own, but I would also like to able to potentially recover a portion of my "investment" should things go awry, i.e. family member is unable or refuses to pay me back. I understand never to mix family with business, and I totally understand and am willing to accept a "total loss" on my car purchase if push comes to shove. Nevertheless I am not in the spirit of just giving away expensive things for "free" and would like to keep the semblance of responsibility for as long as possible (family members pays me "monthly payments" to pay back the cost of the car purchase). My other goal is to minimize my own liability/risk so I do not have to insure the vehicle or be responsible if my family member gets in a car crash, etc.

That being said, is the following scenario legally possible? Do I need a lawyer to draft a loan/purchase contract?

How much will the car cost you? How much are your charging the relative for the car? How much interest are you going to charge on the loan? If your are not charging interest, why not? It's supposed to be loan, and lenders don't generally let people use their money for free. Will you collect sales tax on the purported sale? Nearly every transaction involving money and/or assets is likely to have some tax effect. If you want it to be enforced as loan and not a gift, then you should handle like a sale and collect interest on the loan, which you then report as taxable income. Of course will want a contract for this, and you'll want to get proper security interest in the car that can be recorded on the car title. If the relative is supposed to pay the insurance, spell out what kind of policy it needs to be and the minimum limits on the insurance. If the car is supposed to be used only for personal use and not for business, you may want to specify that in the contract too, or at least expect the relative to carry proper business insurance on the vehicle. Make sure you get proof periodically (e.g. every six months) that the insurance policy has been paid up to date, and if it is not insured that you may take out insurance to cover the car and add that expense to the loan. And if the relative doesn't pay, do what someone in the business of making car loans would do: repo the car and, depending on the laws of your state, sue for any amount of the loan still owed after the car is sold, assuming it's an amount that would justify at least taking him/her to small claims court.

Thos are all things a person in the business of making auto loans would consider, and you should too if you want it to be treated as a business transaction and not a gift. And I might not have picked up everthing. I think it would a good idea for you to talk with a lawyer for help in getting the contract drafted correctly and to ensure you have everything needed to protect your interests in the car in the contract. Also talk to tax professional to ensure you get the taxes right. Tax penalties can be expensive if you don't get it right. Note that even if you make a gift of the car, depending on the value of the car you may have to file a federal gift tax return. Unless you've already made millions of dollars in taxable gifts you wouldn't have any gift tax to pay, but you'd still need to file the return and reduce the lifetime unified credit you get against federal estate and gift taxes. I don't know the tax laws for your state, and you'll want to know how the state and local tax agencies would treat it.

 

[Taxing Matters]

You can combine the purchase and financing agreement into one document.

There are many sample documents on the internet.

car purchase and finance agreement at DuckDuckGo

You can modify and simplify any of them.

States vary on what is required for contracts and security agreements for a car loan, and forms on the internet might not cover what is needed. Unless you know your state's law well enough to know if the internet document is good you shouldn't rely on that. It may be a useful start for your conversation with a lawyer. Note that the security agreement in the contract alone is not enough; you must make sure you complete and submit whatever forms are needed for the motor vehicle agency in your to put the lien on the car title.

 

[adjusterjack]

expect the relative to carry proper business insurance on the vehicle. Make sure you get proof periodically (e.g. every six months) that the insurance policy has been paid up to date,

That brings up an important point. Insurance companies can put the name and address of the lienholder on the policy as "loss payee" for the comprehensive and collision coverage. The "loss payee" gets notice if the policy lapses. In the event of a claim, the check is made out to the insured and the "loss payee." The borrower will not be able to get the money without first dealing with the lender. Lenders often require the borrower to endorse the check over to the lender. The lender disburses the funds for repairs or, in the event of a total loss, applies the funds to the loan balance. If the claim settlement doesn't cover the balance, the borrower has to come up with the difference.

 

[zddoodah]

Could this be written in a single purchase agreement contract, or would I need to make 2 separate contracts (one for the sales agreement, and another for the loan/lien holding) ?

Generally speaking, a "purchase agreement" is not required for non-dealer car transactions. You would, however, need a written loan/security agreement.

 

[Bali Hai Again]

That brings up an important point. Insurance companies can put the name and address of the lienholder on the policy as "loss payee" for the comprehensive and collision coverage. The "loss payee" gets notice if the policy lapses. In the event of a claim, the check is made out to the insured and the "loss payee." The borrower will not be able to get the money without first dealing with the lender. Lenders often require the borrower to endorse the check over to the lender. The lender disburses the funds for repairs or, in the event of a total loss, applies the funds to the loan balance. If the claim settlement doesn't cover the balance, the borrower has to come up with the difference.

GAP insurance may help cover the balance.