Solution 1: Share a Car With One or Two People
People may decide to share a car with a friend or neighbor for many reasons. Here are a couple of examples:
- Marlene and Jory are a couple and own two cars; they live down the street from another couple, Kristen and Colin, who own one car. When Marlene and Jory heard that Kristen and Colin were contemplating getting a second car, they proposed sharing their second car instead. Marlene and Jory felt that it was convenient to have a second car, but they didn't use it on a daily basis. Likewise, Kristen and Colin just wanted an extra car around for those occasional times when they both needed a car. Marlene and Jory put Kristen and Colin on their insurance as secondary drivers, and they started splitting all expenses related to the car.
- Diana lives in a popular neighborhood in Chicago and owns a car. She drives her car a few times a week for errands, appointments, and outings, but commutes to work on the bus. She sometimes spends ten minutes or more searching for a parking space in her neighborhood, and often has to park blocks away from her home. She meets Eileen, who lives two blocks down and does not own a car, but has an empty driveway. They strike up a deal: Diana starts parking at Eileen's house; in exchange, Eileen uses the car on Thursday nights to travel to her ukulele group practice, one weekend per month, and on other occasions that the two arrange.
Who actually owns the car is important and may affect insurance rates, how you split costs, and who is ultimately responsible for the vehicle when issues come up, such as an accident or impoundment. If you share your car with your neighbor, your options are simple: Either one or both of you can own the car.
Keeping the car in one owner's name is a simple approach, leaving no question about who will get the car if you ever end the arrangement. You also won't have to deal with transferring partial title, paying transfer taxes, and so on. The downside is that some insurance companies will not add a second driver who is not an owner or a family member of the owner.
Two or More Owners
Another option is for both of you to own the car. You could buy a car together or, if you already own a car, you can sell a share to your neighbor. You'll have to come up with an appropriate price and keep a written record of your transaction, and your neighbor may have to pay a sales or use tax to buy half of the car. In some states, transferring partial title may trigger other requirements, such as a smog check or transfer fee.
If you are buying a share of someone else's car, find out whether there are any liens on the car. Usually, the loan company that financed the car has a lien on the car until the loan is paid off. This isn't necessarily a bad thing; most cars are financed this way. But make sure the owner is current on the car payments and plans to keep it that way when you become a partial owner—otherwise, the car could be repossessed.
Watch out for certain kinds of liens. Liens can also be placed on a car if the owner takes out a loan, often called a "car title loan," which uses the car as collateral. Be wary of sharing a car with this type of lien. These loans are often predatory and difficult to pay off, and may indicate that the car owner is in a tough financial situation.
To get both of your names on the title, also known as the "pink slip," you will need to follow the procedures required by your state's motor vehicle department. These requirements are often spelled out on the department's website.
You should specify on the title whether you are holding the car in joint tenancy, tenancy in common, or some other form. Joint tenancy means your half of the car automatically goes to the other owner if you die. Tenancy in common means you can leave your half to whomever you'd like, as part of your estate. If you want to leave your share of the car to your co-owner, it makes sense to own the car in joint tenancy.
Rules for Using the Car
It's important to work out the details of your car sharing arrangement ahead of time, to make sure sharing will meet everyone's needs and to help prevent confusion or conflicts. Here are some of the questions you may need to consider:
- What's our schedule for using the car? Will we use it equally or will one of us use it more often than the other?
- Will we have any rules for longer trips? For example, will we have to get permission from the other to take the car out of town, or will there be an annual mileage limit on our car use?
- Who may ride in the car and who may drive it?
- Who owns certain accessories inside of the car?
- Are there any rules about pets or smoking in the car?
- Are there any rules about fueling, such as requiring sharers to refill the gas tank or to leave at least a quarter of a tank at all times?
Many car expenses are easy to determine using standardized calculations —such as the Blue Book value, standard mileage costs, and depreciation tables.
If There Is Only One Owner
If you own a car that you share with your neighbor, your main benefit is the money you save by sharing the car's expenses (plus the bonus good will it creates with your neighbor). There are different ways to calculate the costs: Your neighbor could pay a fee based on mileage or a flat monthly fee based on estimated use, you can reckon car expenses at the end of each month, or you could use a combination of these methods.
Turning a profit could lead to trouble. If your neighbor pays expenses in a way that clearly profits you, you could run into trouble with your insurance company (which might refuse to pay an insurance claim because you didn't disclose this "business" arrangement) or with the IRS (which could require you to pay taxes on what you earned). To avoid these problems, make sure the expenses you charge are "reasonably calculated so as not to exceed" the actual expenses of owning and driving the car. You should write down your method of calculating expenses and keep good records, in case the IRS ever questions you.
Charging for Mileage
The benefit of charging based on mileage is that it's easy to keep track of and add up. The hard part is figuring out how much to charge per mile. If you decide to use a straightforward mileage method, you can adopt either the standard mileage rate set each year by the IRS or a different per-mile cost tailored to your particular vehicle.
The IRS sets standard mileage rates based on its calculation of the actual costs of owning and operating a car, including fuel. For the beginning of 2009, the rate was 55 cents per mile. However, using the annual IRS mileage rate may not accurately reflect the cost of driving. It usually costs less to own and drive an older car than a new one. The IRS rate factors in depreciation and insurance based on newer cars, and both these costs are lower for older cars. Thus, depending on gas price fluctuations during the year and your car's age, you may want to charge less than 55 cents.
To come up with an accurate mileage rate, you could use the worksheet above to find out your annual car expenses, estimating fuel, maintenance, and other variable costs based on how many combined miles you and your neighbor expect to drive. Divide your annual total by that number of miles for an approximate per mile cost.
No matter how you calculate mileage, if the rate factors in the cost of fuel, then the owner of the car should be responsible for paying all fuel costs. The non-owner driver can buy gas, keep receipts, and subtract the gas costs from the total mileage costs.
Sharing Expenses Without Using Mileage
Another way to share expenses when someone else uses your car is to split overhead costs and then divide variable expenses based on how much you each use the car. The overhead costs include insurance and registration; these costs will be relatively static, or vary only slightly based on how much you drive your car. You could even calculate in the cost of three oil changes and one tune-up per year, and an annual roadside assistance membership. It may also be appropriate to ask your cosharer to pay part of the monthly interest charges on your loan—the loan is one of the expenses of owning a new car, after all. And rather than asking the cosharer to help you pay off the principal, you can share the cost of the vehicle by asking for a contribution to the cost of the depreciation, which represents the gradual loss of value of the car (see "Calculating Depreciation" below). The biggest variable cost is fuel, which you can each pay for based on how much you drive.
The cost of "wear and tear" on the car is partially covered by depreciation, but not entirely. This is because wear and tear is partially remedied each time you do maintenance or make repairs. If you are the owner of the car, it may not be fair to ask for your sharing partner to split the cost of expensive replacements, such as brakes, the transmission, or the timing belt. After all, you could end the sharing arrangement any time, and it's difficult to calculate how much your cosharer will have benefited from such a repair. One way to deal with this is to discuss the costs and find out whether there is an amount your cosharer could contribute which you will both feel is fair.
If You Share Ownership of the Car
Sharing expenses is more straightforward if you both own the car. Either of you could pay for gas, maintenance, insurance, registration, and so on, and each keep your receipts in a separate file. Periodically, you could get together, add up each set of receipts, split the total down the middle (or some other division if one of you drives more than the other), and reconcile it with the amount each of you paid. Alternatively, you could do a 50/50 split on all costs except for fuel, which you could divide based on how much you each drive.
If you want to be even more precise, you could each keep track of the number of miles you drive the car and pay in proportion to use. However, keeping a mileage log can be a hassle. Rather than calculate precise mileage, you could simply guess at the difference in the amount each of you drives the car.
Really, you could probably come up with all kinds of ways to calculate expenses. However, most experienced sharers would advise you to keep it simple, even if it means you might pay a little more than your share. When you try to make everything even out perfectly, it gets tedious and dampens the spirit of generosity that leads people to share in the first place.
Financing a Shared Purchase
If you and your neighbor purchase a new or used car together, you will need to decide how to finance the 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.
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 between $200 and $300 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
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. If you both own the car and carry joint insurance, here's an example of language you could add to your carsharing agreement:
"If one owner is involved in an accident for which that owner is partially or completely at fault, that owner will pay any insurance deductibles, and will indemnify and compensate the other owner for any expenses related to the accident that are not covered by insurance. That owner will also pay for any increases in the insurance premium rates.
If one owner is involved in an accident for which that owner is not at fault, owners will each pay half of the insurance deductible (if applicable), any costs related to fixing the car, and any increase in insurance premiums. Any other costs related to the accident, such as medical bills, will be paid by the owner involved in the accident."
If only one of you owns the car, you'll need to use different language, as in the example below:
EXAMPLE: Nancy owns a car and shares it with Silvio. They add this to the agreement:
"If Silvio is involved in a car accident, he agrees to indemnify Nancy for any accident-related costs not covered by Nancy's insurance policy. If Silvio is partially or completely at fault in the accident, he will pay the insurance deductible and any increase in insurance premiums. If Silvio is not at fault in the accident, Nancy and Silvio will split the deductible and any increase in insurance premiums.
If Nancy is involved in a car accident, she will pay for all accident-related expenses, except, if Nancy is not at fault in the accident, Silvio will pay for half the deductible and any increase in insurance premiums."
Sample Carsharing Agreement for Two Owners
This agreement is between Catherine Love and Theo Dancer, who agree as follows:
We agree to share ownership and use of a 2007 Toyota Camry, VIN#: 97233lksfd9f7f, ("the car").
Transferring title: Within one (1) week of signing this agreement, Catherine will transfer title of the car from her name to both of our names, "Catherine Love and Theo Dancer, as tenants in common." Theo will pay all taxes and title fees related to the transfer.
Ownership of the car: In consideration for 50% ownership of the car, Theo will pay Catherine $4,150, which we agree is half of the current Blue Book value of the car.
Accessories: We agree that the following accessories in the car will remain Catherine's separate property: the roadside emergency kit and the steering wheel locking device.
Parking: We will keep the car at Theo's apartment on Sluggage Street.
Use of the car: Catherine can use the car on Sundays, Mondays, and Tuesdays, and Theo can use the car on Wednesdays, Thursdays, and Fridays. We will take turns using the car every other Saturday. We may from time to time negotiate a new schedule. If either of us needs to use the car on a day when the other person is designated to use the car, that person may ask the other for permission to use the car. The person to whom the car is designated may refuse without giving a reason.
Long trips: Unless we agree otherwise, if one of us wants to use the car for a trip longer than three days, that person will rent a car for the other to use on the days the other normally would have had the car.
Decisions: We will both take part equally in decisions related to the car. Neither of us will agree to sell, encumber, or make expensive repairs or improvements to the car without the other's permission. If we cannot reach an agreement about any matter pertaining to the car, we agree to discuss the issue with the help of a mediator.
Responsibilities: We will each be equally responsible for filling the gas tank and keeping the car clean. Catherine agrees to take the car for regular maintenance.
Rules: Each of us agrees not to lend the car to anyone without first discussing it with and getting permission from the other. We will never lend the car to an unlicensed driver. Smoking is not allowed in the car.
Costs: We will divide all insurance, registration, maintenance, and repair costs equally. We will each keep our receipts in separate envelopes in the glove compartment. Every three months, we will add up our costs and reimburse each another for any differences in expenses. Each of us will pay for the gas we use. Rather than keep strict records of our mileage and gas expenses, we will try to buy gas in rough proportion to the number of miles we drive. The car gets about 30 miles per gallon.
Insurance: We will carry an auto insurance policy with the following company: . Our policy will cover up to $500,000 per victim, $1,000,000 per accident, and $50,000 for property damage. Catherine will be listed as the primary driver and Theo as a secondary driver. We will each pay half of the insurance premiums. If one of us receives a speeding ticket or does anything to mar his or her driving record, that person will be responsible for any increase in insurance premiums that result. If the insurance company deems that the car is "totaled" and pays us to replace it, we will split those proceeds.
Indemnification: If one owner is involved in an accident for which that owner is partially or completely at fault, that owner will pay any insurance deductibles, and will indemnify and compensate the other owner for any expenses related to the accident that are not covered by insurance. That owner will also pay for any increases in the insurance premium rates.
If one owner is involved in an accident for which that owner is not at fault, owners will each pay half of the insurance deductible (if applicable), any costs related to fixing the car, and any increase in insurance premiums. Any other costs related to the accident, such as medical bills, will be paid by the owner involved in the accident.
Dispute resolution: If a conflict or dispute arises that we are unable to solve through discussion, we agree to attempt to resolve the dispute through mediation. We will seek to mediate through Los Alamos Community Mediation.
Termination: If one of us wants to stop sharing the car, we will consider these options in the following order: (1) the other owner will keep the car and pay the departing owner half of the Blue Book value of the car at that time; (2) the departing owner will keep the car and pay the remaining owner half of the Blue Book value of the car at that time; or (3) we will sell the car and split the proceeds.
Ending the Arrangement
The questions in Chapter 3 give some general guidelines about planning to terminate a carsharing arrangement. When you end your carshare, make sure that you transfer title to the remaining owner. If you leave both names on the title, you may have to track down your former co-owner in order to sell the car later. Best to get all of the paperwork done at once.