Risks of long-term borrowing a car from a friend?
February 1, 2014 1:23 PM   Subscribe

I have a sudden need for a car for the next several months. An awesome friend has offered to lend me his. What could go wrong?

Details: I do not own a car currently and am not sure I'll need one after my new gig ends in several (6?) months. But I do need car transportation for the moment. A friend has a car just sitting in their driveway that he hardly ever uses and has kindly suggested we work out an arrangement so I can make use of it. It does seem like a situation that would benefit us both.

If we did this, I'd basically expect to operate the car like an owner (paying for gas, airing the tires, minor maintenance). I'd pay him something every month for wear and tear - essentially renting the car from him.

-My insurance company has told me that the car's owner's insurance policy is always primary, even if we all agree I should be financially responsible for it while using it.
-I really, really want to remain friends with this person. He would be doing me a serious favor and I want this arrangement to make his life less, not more, stressful.

So: is there a creative way we can make this work (buying and then selling it back?) with me assuming the risks of using the car and minimizing the risks that some car-related financial disaster will ruin our friendship? Or should we just not even wade into these waters and have me just buy a used car instead?
posted by catesbie to Work & Money (21 answers total)
The biggest issues are:

1. Are you willing to take FULL responsibility for any repairs?

2. Does he realize that, if you have an accident, he could be sued.

I would suggest a contract under which you buy it and sell it back at an agreed upon price at both ends and clear clauses regarding damages and their repair.

It's the liability issue that would keep me from lending a car, even to a very close friend or relative.
posted by HuronBob at 1:29 PM on February 1, 2014 [7 favorites]

His insurance company may be really not okay with someone who is not him and is not named on the policy driving it regularly, especially for business/commuting reasons. He should check his policy and call his insurer if he has any questions.
posted by rtha at 1:32 PM on February 1, 2014 [1 favorite]

The rule of thumb with lending to friends is "never expect it back." So if your friend is not going to hate you if the car somehow gets totalled, then go for it.
posted by aniola at 1:34 PM on February 1, 2014

I wonder if you could rent it using Relayrides as an intermediary -- they take a cut, but they provide separate insurance that insulates you from your friend.
posted by miyabo at 1:34 PM on February 1, 2014 [2 favorites]

If you pay money to your friend for the use of the car, that could be rental for the purposes of insurance. Individual car insurance doesn't cover that.
posted by wnissen at 1:37 PM on February 1, 2014

Write it all down, and see if there's some way you can insure it yourself, including comprehensive (if you can't afford to buy it outright.)

1. Fix on a fair price for the car and write it into your agreement. You can get this from Kelly Blue Book. If it gets totaled (heaven forbid) then there's writing that you have both agreed to a certain price, so no hard feelings for either of you.

2. What happens if on day two, the transmission falls out of the damn thing? Are you on the hook for $2,000 to fix it? What's reasonable? Make provisions for any major repairs due to wear on the car. Perhaps a cap at 20% of the total value of the car.

3. See what it would take to be added to your friend's insurance and then be prepare to pay for it.

Basically think of your friend's financial well-being and protect it as though it were your own.
posted by Ruthless Bunny at 1:42 PM on February 1, 2014

I think that buying it and selling it back is your best bet. Your friend could even finance the purchase, so there's no large transfer of cash involved. Say the car is worth $10,000, do something like this:

Today: Borrow $10,000 from your friend and immediately pay him $10,000 to buy the car from him. Do it all official-like, which will unfortunately probably mean paying sales tax on the purchase, but register it with the DMV so that it's a true transfer of ownership. Come up with a reasonable interest rate for the loan, noting that the IRS requires you to charge at least some interest if you don't want to start dealing with gift taxes. Your friend will be required to report the interest on his taxes as income.

A $10,000 loan at 3% APR, financed for five years results in a monthly payment of $179.69.

March 1: Pay your friend a $179.69 loan payment. Interest on the first month's payment is $25, so now you still owe your friend $9845.31.

April 1: Pay your friend $179.69; your loan balance is now $9690.24


September 2: Your friend wants his car back right after your 9/1 payment that brought your balance down to $8909.04.

Possibility 1: KBB value of the car has dropped to $9300. Your friend buys the car back from you for $9300; $8909.04 of that is used to pay off your loan and he gives you a check for $390.96

Possibility 2: KBB value of the car has dropped to $8500. Your friend buys the car back from you for $8500; You give your friend a check for $409.04 to pay off the remainder of the loan.

Possibility 3: KBB value of the car has dropped to $9000. Along with your monthly payments, you spent $2000 on a transmission repair in August. Because of this recent mechanical upgrade, the two of you agree to add $1000 (half the cost of the repair) to the KBB price, meaning that your friend buys the car back from you for $10,000. Your friend writes you a check for $1390.96.

Possibility 4: Something changes and your friend never wants to buy the car back, or you never want to sell it back; instead, you just financed a car over five years at a very nice interest rate.
posted by Hatashran at 2:16 PM on February 1, 2014 [2 favorites]

I probably wouldn't do this with anyone who wasn't immediate family. Too many ways it could go wrong. Just buy a used car and sell it at the end.
posted by amaire at 2:16 PM on February 1, 2014 [4 favorites]

I think you should buy a used car instead and not wade into these waters. Having loaned expensive things to friends in the past, I guarantee something will go wrong that could sour your friendship for life and it's not worth risking it.
posted by These Birds of a Feather at 2:34 PM on February 1, 2014 [1 favorite]

absolutely not. long-term borrowing creates more problems than it solves, particularly with cars and their mandatory insurance requirements/ferocious exposure to liability. the creative solution would be for him to sell it to you on easy (sweetheart) terms so that you take title and legal responsibility immediately.

a famous writer once said that borrowing dulls the edge of husbandry.
posted by bruce at 2:39 PM on February 1, 2014 [1 favorite]

I agree that your friend should sell you the car and then buy it back when you're done with it. It makes things far simpler across the board for many of the reasons already outlined above.

That said, make sure that the price you pay minus the price you'd get at a used car lot is equal to the total amount you'd be willing to pay to "rent" the car for the time you intend to keep it -- in other words, don't start this process unless you have a way of achieving satisfaction without your friend buying the car back.
posted by telegraph at 2:39 PM on February 1, 2014

If he isn't emotionally invested in the car at all, offer to pay the IRS reimbursement rate per mile you drive ($.55 IIRC). He pays gas, insurance (make sure you are on the insurance!), damages, repairs, whatever. You pay $.55 per mile; it's a lot more than the fuel cost, but compensates him for expected wear & tear and the risk of damage.

I think you should insist he have comprehensive/collision, so he isn't out much if you total it (causing a friend to lose $10k would strain the relationship otherwise). And, to repeat, if he's emotionally invested in the car, don't do it at all.

Some car places will rent cars on monthly or weekly basis.
posted by flimflam at 2:43 PM on February 1, 2014

Depending on the state you live in there may also be issues of vicarious liability if you were to have an accident. If the sales tax wouldn't be too painful I nth selling it or at the very least getting a lawyer to draft a lease agreement.
posted by phearlez at 2:50 PM on February 1, 2014

I wouldn't bother with a buyback scheme, or anything that implies you are leasing the car. If he offered to loan you his car for six months, you must be very good friends, or else he doesn't care that much about his car. You can either borrow it, or not. If you want to reimburse him for wear and tear, give him a wad of cash or an expensive gift after you're done borrowing it.
posted by BabeTheBlueOX at 5:08 PM on February 1, 2014

I would see if there is some way to get comprehensive insurance on the car with you as the primary driver, with a deductible you feel comfortable paying, at the very least.
posted by jsturgill at 6:26 PM on February 1, 2014

My wife and I lent our car to friends while we were overseas for a year. We added them to our insurance as primary drivers and wrote a letter that said they could use the car for the period we'd be gone. Our insurance company (State Farm, in Vermont) was cool with it. We had an informal understanding that they'd handle routine maintenance and any damage, but we were all 30-somethings with decent jobs, so there really wasn't any risk of monetary loss we couldn't afford. In the end, there were no problems, they found the car useful, we were happy it was being driven regularly, and when we got back, we removed them from the insurance.

The big issue for our insurer wasn't who would be driving it (we all had clean records); it was actually knowing where the car would be garaged.

If you and your friend are willing to work out an informal loan arrangement, then I'd suggest talking to his insurer about adding you as a primary driver and noting that the car will be garaged where you live. I'd offer to pay all the insurance, but especially any increase (if there is one).
posted by brianogilvie at 7:15 PM on February 1, 2014 [1 favorite]

Even if he sells it to you and then buys it back, how will you feel if e.g. the engine dies the day after you bought it and it's going to cost $4000 in repairs? I don't think the buying/reselling thing covers that risk adequately.

Plus having to pay sales tax on the buying and reselling would annoy me, if I were you.

I think you should figure out how much it would cost you to rent or lease a car for that time, or how much you would be willing to spend on a new car, and give him a gift of a proportion of that cost. Maybe half? And then have an agreement that a major repair during that period that is due to wear and tear (e.g. if the engine does die through no fault of yours) is up to him to pay for (or not pay for if he decides repairing it isn't worthwhile). A major repair due to negligence or an accident on your part is due to you to pay for. Find a mechanic you both trust and agree that you'll let him/her determine whether a repair is due to wear and tear or negligence.

And minor repairs you should pay for. In your budget where you decide what you can afford for this time period, you should totally expect some minor repairs.

Finally, definitely double or triple check how his insurance is going to treat you if you have an accident or cause damage to someone else's property or person during this period.
posted by lollusc at 7:16 PM on February 1, 2014

(By "new car" I meant "new to you", i.e. second hand.)
posted by lollusc at 7:17 PM on February 1, 2014

Cars are expensive; it's not just the gas and oil, but tires, insurance, excise tax, and the mileage you put on the car reduces its value and hastens repairs. Take it to a mechanic because you should both know its condition. What's the deductible on the insurance? If you get in an accident, you're on the hook for that, at the very least. Make sure he has good liability coverage. That said, what a nice friend. It really does cost something like .10/ mile above the cost of the gas and oil. Have a really frank conversation about the what-ifs. While using it, keep it washed, change the oil as recommended, fix anything that comes up. At the end of using it, reimburse friend .10/ mile.
posted by theora55 at 2:09 AM on February 2, 2014

Response by poster: Thanks all. I think everyone involved is really committed to being super above-board and responsible and generous about this - so we've agreed that the only intelligent course of action is HuronBob's suggestion - a written agreement for me to buy the car and sell it back when I'm done with it, and care for it as my own - since, in fact, it will be, temporarily.

I'm a bit disappointed that the car insurance industry, like so many others, actively discourages the sharing of expensive things that people do not need a whole one of by themselves, but indeed this seems to be the case, and we could find no way around it that let my friend off the hook for liability.

And while just buying a used car from a dealer might have been in some sense more straightforward for me, this arrangement works out really well for both of us - it's far cheaper for me than any other available option, and it allows my friend to save some cash by getting this car off his insurance for a bit and make a little money out of it (since I'll be selling it back for a fair bit less than I bought it for). Obviously YMMV depending on the relationship the lender has with their friend and their car, but having discussed all foreseeable contingencies, we've decided we can live with the worst-case scenarios.

Sharing economy FTW!
posted by catesbie at 6:03 PM on February 3, 2014 [1 favorite]

I don't know if this would be helpful, but if there's some way to put the money from the sale in escrow....
posted by aniola at 6:10 PM on February 3, 2014

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