There are many reasons a car shopper decides they want to purchase a vehicle for another party. Maybe they're buying it for their kid who is just starting to drive, or perhaps an elderly parent. They could also be looking to buy a car as a gift for a significant other or help out a friend who has bad credit. Although we're used to seeing ads that feature shiny new vehicles with big red bows, surprised recipients, and proud gifters, there's a lot more that goes into buying a vehicle as a gift. We'll address common questions like "Do you need a license and insurance to buy a car?" "How can you gift a car?" and, "How does auto financing work in this scenario?"
Do I Need a License or Insurance to Buy a Car?
Let's start with some of the logistics. If you're not a car owner yourself, and you want to purchase a vehicle for a family member or friend, you may not have some of the documents that are needed when buying a vehicle. These include a current driver's license to test drive the vehicle (and drive it off the lot) as well as car insurance.
As long as you have another form of government-issued identification that you can use as proof of identity, you're not required to have a driver's license to purchase a vehicle. You will need one to test drive the car and to take it home, however. If you have discussed the purchase with the recipient, they will be able to come along to the dealership and will need to bring a valid license in order to get behind the wheel. If the purchase is a surprise, another licensed driver will need to be present to help you take the vehicle home.
The auto financing step can also be stalled by a lack of a valid driver's license. According to Car and Driver, the dealership's finance team will be hesitant to issue loans to buyers without a license since it's assumed the unlicensed buyer will have part ownership in the vehicle.
Insurance coverage is the other piece of the car buying puzzle. The vehicle will need to be covered before it can be driven, so the recipient of the car will need to have an insurance policy in their name. If you choose to purchase the insurance policy along with the vehicle, you can list the recipient as the primary driver on the account.
Gifting a Car
When it comes to gifting a vehicle, it's best to discuss the purchase beforehand. Unless you share your finances with the recipient of the vehicle (in the case of a spouse, for example) surprising someone with a car gets tricky. Even if you're able to pay cash for the entire car purchase, there are a number of other expenses associated with car ownership including maintenance, insurance, and fuel. These can add a substantial burden to monthly expenses, so you'll want to make sure the recipient is ready to take them on.
If you're not planning to pay for the vehicle outright, you'll have to decide if you'll take on the car loan payments or have the recipient cover them while you help with the down payment. The logistics of car loans in the case of a gift are addressed below. If you choose to pass on the loan payments to the recipient, they will need to be actively involved in the purchase and agree to the loan amount.
Oftentimes, the recipient of a gifted car will be a first-time car owner like a teenager or college student. They should understand the responsibilities that come with car ownership including all the expenses involved. If you don't plan to help out with all the additional costs, you need to be sure the young driver is comfortable taking them on.
Perhaps the most confusing part of buying a car on someone else's behalf is the car loan process. In order to buy a vehicle for another party, you'll have to put the loan entirely in your name, cosign, or co-borrow with the recipient. The person receiving the car will need to go to the dealership in person to cosign the loan, and if you're planning the gift as a surprise, you will need to put the loan into your own name. The title of the vehicle can still be registered under both your name and the recipient's.
Compromised credit can make buying a car difficult. If you're looking to buy a car to help out a friend or family member with bad credit, your best bet is to act as a cosigner or co-borrower. Financing a car in your name and then transferring it to someone who could not obtain a car loan on their own is called a 'straw purchase' and it is illegal and risky. Using someone else's name to secure a car loan because of poor credit also falls under this umbrella. Co-signing on the loan means you will be responsible for making payments if the primary owner defaults, so you should be prepared to take on this risk.
Making sure you and the recipient of the vehicle are on the same page about the ins and outs of the car purchase is crucial. Discuss how the auto loan will be handled and who is responsible for the down payment, monthly payments, insurance, and maintenance costs before heading to the dealership.