Buying someone a car seems like the ultimate gift, especially if you're watching car commercials this time of year.
But owning a car involves gas, insurance, maintenance, and potentially a loan payment. Before you decide to give anyone this kind of gift—whether a child, significant other, or best friend—there are a whole lot of financial and emotional decisions to consider.
Here are the steps you should take before deciding if you want to give someone such a big gift:
1. Figure out if you can afford it, and what your future obligation might be
When you decide to give someone a big gift, it's exciting and can produce as big an adrenaline rush for the giver as for the person who gets to use it. Before you start down this road, decide whether you can afford the gift at home—without any pushy salespeople around you.
Look at your budget and decide if you can afford the downpayment, full amount, and/or the monthly payments. Since you are purchasing the car for someone else, you will also be liable for the loan if you are either the cosigner or the loan holder. Make sure you can afford those payments if they can't at some point. (Watch: How Can Cosigning Affect My Credit?)
2. Think about why you're spending so much
Before you have a discussion with the person who would receive the present, think about why you are spending the money. Is the car needed? Have they talked about buying a car? Are you helping them buy the car they want? Could they afford the insurance payment? What will this purchase prevent you from doing?
Once you are set in your decision, you are then armed to have a discussion with them.
3. Make sure you and the other person are fully aware of the responsibilities involved
Once you've decided what you can afford, have a frank discussion with the person you're buying the car, or another outsized gift, for to make sure they want (and can handle) the responsibility. If the purchase is for a teenager, make sure they know what they will be required to pay and fully educate them on the details of the expenses they'll incur.
A new car always sounds great to a teenager, but the work and sacrifice they may have to do for maintenance, gas, insurance, and loan payments may not be worth it to them.
4. Know your loan options
If you purchase a car for someone else, you have the option to have the loan in your name or to cosign with the individual you're buying it for. The only way to buy the vehicle as a surprise is to put in the loan in your own name. The title may be registered under both names.
For the other person to take over the loans, you'll more than likely have to sell them the car, so they can refinance it. If co-signing, you will have to bring the person with you to the dealership. The final option is if you are providing the down payment, the individual receiving the gift can come with you to get their loan for the remainder of the balance if they have the credit to do so. (See also: 4 Things to Consider Before Signing That Car Loan)
Buying any item that requires someone to put their own money in requires extra care, consideration of their needs, and several discussions. Whenever possible include them in the decision-making process early on. Your finances and your relationships will be better off.
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