Making a contract for financing a car for a friend is a fairly simple process, but it should be done with extreme caution. You must word your contract with specific requirements in case your friend cannot or will not honor the agreed upon terms. Since you are the lender, you have the flexibility (within reason) to structure the loan terms how you see fit. Your friend then has the option to either agree to your terms and enter the contract, or refuse your terms and seek funding elsewhere.
How to Make a Contract for Financing a Car for a Friend
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Step 1
Verify the income source your friend will use to repay you. If you are not convinced of her ability to repay you, do not sign a contract to finance a car or anything else. You need to know that your friend has the repayment ability and the will to repay you. Require a non-refundable down payment in an amount that your friend will not want to simply walk away from.
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Step 2
Discuss the type of vehicle your friend needs and the price range for that vehicle. Remember that the price range will determine the payment amount due at each pay period. That payment amount needs to be well within the range of what your friend will have available for repayment. Do not, under any circumstances, allow your friend to talk you into a price range and payment near or at the entire amount he has available to make the payment. Keep a safe dollar amount cushion in case he develops a financial emergency.
Step 3
Write down your full agreement on paper. Be sure to include all terms. If your terms are not written in the contract, they probably will not be legally enforceable. The terms need to include the total amount loaned, the total amount to be repaid, the interest rate, the payment amounts, the payment due dates, a schedule of late payment fees (usually a percentage of the total loan) and the date the loan will be repaid in full. Be sure to include a plan of action should a payment be missed. Set your repayment schedule for weekly payments. This will give you a quicker alert if a payment is missed, enabling you to cut your losses.
Step 4
Read aloud and discuss your contract with your friend. Have her initial and date each part of the contract, then have her sign and date your contract at the bottom. Have a neutral witness (preferably a notary public) present. Have him sign the contract as witness to the transaction and attach his notary seal to your contract. Legally record your signed contract.
Step 5
Locate and negotiate a purchase price for a vehicle you both have agreed upon. Keep in mind an amount you will not go beyond, and stick to it. If the vehicle cannot be bought at your price, walk away whether your friend agrees or not. Do not forget that this is your money you are using, so you have the final say--not the current owner or your friend.
Tip
Use extreme caution when lending to friends and family. Only do it if there is no other way to help and you are sure you will not be taken advantage of.
Warning
Money issues between friends and family can be very touchy. You stand to lose a friend and your money if something goes wrong. Never finance a car for another person, unless you can see yourself driving it. You may end up doing so.