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My friend is buying a car. She does not have money for the down payment. So I am going to lend her money. I have two options:

  1. I give her a cheque and then she pays to the dealer.
  2. I pay directly to the dealer (on her behalf)

Are there any advantages / disadvantages of one option over another?

  • Based on your friends situation she probably wont be doing this anytime soon, but if she applies for a mortgage and there is a check from you deposited to her account for a sizable sum then she will need to explain where it came from. – treeNinja Sep 24 '14 at 20:13
  • Get a contract for the loan signed by your friend before you decide this. – Andy Dec 27 '14 at 0:49
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From your viewpoint you paying the dealer directly is better. You know that the check went to the dealer, and was used to purchase a car.

If you give the check to your friend they may say I can't find the car I want this week, so I will purchase it next week but first let me by groceries and a new suit. I will replace the funds after my next paycheck. Next thing you know they are still short of funds. This might not happen, but it could.

From your friends viewpoint getting a check from you allows them to potentially keep your part of the transaction out of view of the dealer/lender. In a mortgage situation the lender will take a look at your bank account to make sure there isn't a hidden loan, but I am not sure they do when they are approving a car loan.

What you want to avoid is being a co-signer for the loan. As a co-signer you will be responsible for all payments; and missed payments will hurt your credit score.

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It doesn't matter if you give the check to the dealer or your friend. But under NO circumstances should you co-sign your friend's car loan. Since the money you are giving is a loan, I highly, highly recommend you do the following:

  1. Prepare a promissory note to formalize the loan arrangement. Make sure your friend signs it and you both agree to the payback terms. Google for "promissory note" and you will find many examples. http://www.nolo.com/products/promissory-notes

Requiring a signed promissory note shows you are serious about getting paid back, and gives you some legal protections if you are not paid back. If you go to a random small claims court on any given day, you will witness at least a few cases where one person says, "it was a gift!" and the other says, "it was a loan!". With a promissory note, it's a loan, period.

  1. Prepare not to get paid back, even with the note. It happens all the time. Think about what you will do if your friend misses a payment to you or never repays the loan. Will you forgive or get legal and try to collect?

  2. Again, do NOT co-sign the loan.If you do, and your friend does not make car payments, you will be 100% responsible and the lender will take legal action against you to collect.

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If you can afford it, I would give her the money. It is likely that she will not pay you back and then you would lose a friend.

This friend cannot afford the car. If you want to be a really good friend, offer different options like buying a junker until she can save up for a nicer car.

Based on your comment, I am gathering the following:

  1. You can't/don't want to give her the money.
  2. You are having difficulty saying no.

Sorry to beat a dead horse, but lending the money is akin to giving her the money. So if you don't want to give it to her, then you can't lend it to her.

She has "car fever", she thinks she cannot live her life without this car. She can, and you know it. In a week or two, she will have forgotten all about it.

Since you cannot really say no (for whatever reason) you can "pocket veto" the idea through distraction. Make her do a lot more legwork and in the end she will probably forget about it.

So what I might suggest to her is that she goes to a credit union or a local bank to try for a car loan and see what they say. You might sweeten the deal by saying they typically have lower interest rates then the place that is offering the loan now. Alternatively you should tell her to let the car deal sit for a couple of weeks to see if you can talk them down on price. The key is stalling, so the next shinny thing distracts her.

Now the dad in me is going to come out, please consider yourself yelled at for these items:

  • Grow a backbone. Learn to say no. This person is trying to steal from you.
  • Choose better friends, don't be afraid to let bad ones go.
  • "Iron sharpens iron", hang around people that have plenty of money.
  • Don't give out to many details about your financial situation.
  • Good job on having enough money to loan this person, keep that up.

Have a nice day.

  • Isn't there a gift tax aspect as well. – Dheer Sep 24 '14 at 16:57
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    I am assuming that the down payment was less then 14K. – Pete B. Sep 24 '14 at 17:14
  • I agree to what you said, I have tried explaining it to her. But we all got things to do anyways. I would really appreciate if you explained which option is better or both are equally bad. Thanks – tempusfugit Sep 24 '14 at 18:58
  • @san1646 please see my updated answer. – Pete B. Sep 24 '14 at 19:44
  • This doesn't answer the question. – Andy Dec 27 '14 at 0:54
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Either approach will put a strain on your friendship, unless you are willing to treat it as a gift which may or may not be returned rather than a loan.

I agree that paying it direct to the dealer (or giving her a check that is made out to the dealer) avoids the risk of the money getting sidetracked.

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