Myth #4 - Your oldest has graduated from high school, and is headed to college soon. So is your wallet. You have made your list: tuition, books, computer, clothes, food, dorm, Greek, automobile. Wait a minute - what about the automobile? Who should own it? Who should pay for it? How much is your insurance going to increase?
Legal mythology in credit unions, banks and finance departments at almost every auto dealership is that the parent should own the car, or be a co-owner and co-maker of the loan with the child. Follow that mythology at your own peril, and pray that the first accident isn't a bad one. This is a seriously flawed concept that we hear time and time again, many times, unfortunately along with the news of a tragic accident.
Firstly consider a fact of life - insurance for teenagers (and those in their early 20s) is really expensive, especially for high coverage limits. If you've accumulated even a little bit of assets, you haven't insured yourself for the minimum coverage in a long time. If you could have your college-bound teenager insured for the minimum, and be certain that liability for an accident will not touch you, would that not be a better economic choice? After all, your teenager doesn't own anything yet; he or she can't lose non-existent assets. But wait a minute - what about the car?
Since your teenager is now age 18 and therefore of legal age, he or she can own the car. There are two practical problems to having your teenager own the car; (1) you don't want to make a gift of the vehicle, (2) because most teenagers are by definition knuckleheads. If he or she has a bad day, exam, break up with boyfriend or girlfriend, etc. you do not want to receive a telephone call from some distant point on the planet that he or she has just run out of the funds derived from selling the car, and needs help getting home.
The practical solution is either becoming a guarantor of the loan to your teenager (who will be the sole owner of the vehicle), or have your teenager own the car, sign a loan with you, a security agreement on the car and a lien on the title. Yes, both methods mean you would have "bought" the car, but you were going to do that anyway, one way or the other. If he or she successfully completes college and hasn't gotten into too much trouble, the title may be transferred to your recent college graduate as a reward.
This way you can insure the vehicle for minimum coverage; your child will be treated as residing wherever their college is, and you have removed the temptation to run away from a bad day. You also will need to ask your auto insurance company to revise your insurance to declare that your college-bound teenager is no longer a member of your household. The insurance company may place a restriction on your policies disallowing any driver under the age of 25.
A second fact to remember is that the owner of a motor vehicle is the primary party responsible for any damage or injuries that the motor vehicle causes, no matter who the operator is. The million-dollar mistake is to own the vehicle your student is using, even a partial ownership. To avoid that potential of huge liability, your college student must own the vehicle. The savings you can generate by structuring this correctly is just a bonus. Do not allow the finance department of the auto dealership, your credit union or your bank to direct you to the contrary. Play it safe.
