Financing the Purchase of and Insurance Costs for a Shared Car

Here’s how to finance the purchase of (and insurance for) a car that you co-own with a neighbor or friend.

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If you and a neighbor or friend purchase a new or used car together, you will need to decide how to finance the purchase of the car and to insure it.

Sharing the Purchase Cost of a Co-Owned Car

There are different ways to share the purchase cost, depending on your financial needs. For example, if you and your neighbor buy a used car for $9,000, your neighbor may just want to pay a lump sum, rather than take out a loan, while you need to get financing. In that situation, your neighbor could make a $4,500 down payment on the car, and you could take out a loan in your name only for the remaining $4,500. Your neighbor could even choose to pay the full $9,000 and you could arrange to pay her $4,500 (plus interest) in monthly installments.

If you both sign a loan, both of you will be liable for the full monthly payments. If one of you doesn't pay, the lender is entitled to seek full payment from the other. If you default on the loan, both of your credit reports will suffer, even if you made your share of the payments faithfully, on time. The car could also be repossessed.

Buying Insurance on a Shared Car

Insurance companies respond in different ways to carsharing arrangements. Our best advice is to call different insurance companies, tell them how you are planning to share the car, and get some quotes. Some companies will tell you that sharing won't raise your rates at all. At the other end of the spectrum, other companies will refuse to write a policy for a shared car.

If You Both Own the Car

If you and your neighbor share ownership of a car and are both listed on the title, your insurance company shouldn't have too many qualms about insuring you both. Co-ownership gives each of you an "insurable interest" in the car, which means each of you would suffer a financial loss if the car were damaged.

If you both own the car and take out a joint policy, both of you could be liable for the vehicle and any accidents. Still, your insurance company will probably want you to designate a primary and secondary driver. Usually, the primary driver is the person who drives the car the most. If you and your neighbor use the car equally, you might want to designate as primary whoever has the best insurance rating (the best ratings typically go to women who are older than 25 and have clean driving records). Some insurance companies will list two primary drivers, but may require that the owners be spouses or legal partners under a domestic partnership or civil union law.

If One of You Owns the Car

If you own the car and allow your neighbor to use it, you must tell your insurance company and add your neighbor to the policy. You should not try to pass your neighbor off as an "occasional" driver, meaning someone who does not have regular access to your vehicle but is driving it with your permission. If your neighbor has an accident and the insurance company concludes that he or she is actually a regular driver, the company may deny the claim and even rescind your policy.

Some insurance companies will add another driver to your policy as a "secondary" driver. They may not even raise your rates unless your neighbor has a bad driving record or your sharing arrangement will put a lot more miles on the car every year. Some companies won't allow you to add a secondary driver who doesn't live with you. If you run into this problem, just call another insurance company.

The owner of the car is the primary person liable for accidents. If your insurance is not enough to cover the damage and injury from an accident, accident victims could seek additional compensation from you or from your neighbor, if the neighbor was at fault in the accident. The best way to avoid this scenario is to carry a high limit of liability, such as $500,000 to $1,000,000. This will make your insurance somewhat more expensive, but at least you will be splitting the monthly premiums.

Another option is to have your sharing partner get non-owner's auto insurance. Non-owner's insurance is for people who drive someone else's car on a regular basis. It only kicks in if the car owner's policy is not sufficient to cover the cost of an accident. Non-owner policies do not cover damage to the vehicle, but they'll provide extra liability coverage in case your neighbor is at fault, and may include additional personal injury coverage. These policies usually cost a few hundred dollars per year, but may cost more if your neighbor has a poor driving record. Even if your neighbor's record is clean, however, it's usually cheaper to simply have one policy (your policy) with a high limit of liability.

If There's an Accident Using a Shared Car

You and your neighbor can make additional agreements to compensate each other for accidents; lawyers refer to this as indemnification. You may want to make different agreements depending on whether you both own the car or only one of you owns the car. You will also want to think about what happens if one driver is in an accident that isn't that person's fault. Should both drivers bear the cost of that misfortune or should the driver bear it alone? One option is to have both owners share the cost of the insurance deductible and car repair, and have each driver pay individual medical costs that aren't covered by the insurance of the person who was at fault. You should also decide who is going to pay if the monthly insurance premiums go up as a result of the accident. You should include language in your carsharing agreement covering these situations.

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