Will banks allow one spouse to get an auto loan to buy a car from the other spouse

Question

My husband was in an accident with our family’s van so we have to buy a new one. The insurance is paying off our existing note in full. We have found a pre-owned van that we want to purchase as a replacement and we are considering how we should pay for it.

We know dealerships (this vehicle will be purchased from a dealer) HATE cash purchases. We’ve been flat out denied service before when we took out our check book. Plus, we aren’t comfortable taking that much of a hit to our savings right now. So, we won’t be purchasing outright.

The option we’re contemplating is for one of us purchase the van with our high limit travel rewards credit card, for which we’d get 2miles per $. Then, in order to avoid interest, the other spouse would “buy” the van with a traditional auto loan from our credit union from the spouse as a “private seller.” In our perfect little scenario, we’d get the miles, the van, and a monthly payment/interest rate we can afford. Our goal is a much needed vacation. It’s been a tough year (which is only half over.)

Does anyone see any pitfalls we don’t? Is it likely the credit union (or any lender) will permit this? My husband and I both have excellent credit (800+), about equal income, and little debt besides our home (mortgage + HELOC, HELOC is paid off, mortgage is ahead of schedule.) We realize that this might be an unheard of option because it isn’t feasible. But we’re hoping that it’s unheard of because it isn’t feasible for most people...our financial situation being better than all our peers, and our parents, we only ever hear about traditional lending scenarios (ie just take on more debt). Thanks in advance for folk’s input.

We will most likely be getting a settlement from the insurance company since my husband was not at fault, which we will use primarily to pay for the van, but, 1) we need the vehicle now, and insurance claims take months to settle; and 2) we never count our chicks before they hatch, so to say. We only do/buy things we can afford now. Worst case scenario is we make payments the life of the loan, best case is we pay it off w/insurance money.

Answer 1

To answer the question, yes, you can get a car loan to "buy" a car from your spouse. You can even get a car loan on a car that you already own outright! Now, the bank may ask why you are doing this any you may not get a great interest rate (since it's a sign that you are cash-poor), but it is possible. But, I don't think you need to.

We know dealerships HATE cash purchase

No, they make you think they hate cash purchases so that you'll use their financing, since they get a kickback for initiating a new loan that they can then sell to some bank for a small profit. Use this as a negotiating point. Say you'll finance the car through them if they take, say, 5% off of the car price. Then pay off the loan as soon as possible (it usually takes a few days to get all of the paperwork through to set up a servicer). Otherwise, you're walking away. You can even tell them that you're going to pay off the loan the next day. They don't care; they are getting their kickback from the financing company whether or not you keep the loan.

Walk away power is the single greatest negotiating leverage you have.

Answer 2

It sounds like your main goal here is to take advantage of your credit card miles. Unfortunately I don't think you'll be able to use the CC in this case. The larger the purchase price, the less likely the seller will want to accept a CC as payment. Car dealerships may accept a small amount with a CC but almost always won't let you pay for the entire car with one. If they were willing to, then mathematically they should be willing to drop the price by at least 2% if you didn't use a credit card. It doesn't hurt to ask though, but if you do make sure it's after you negotiate the purchase price. Otherwise the dealer would likely just inflate the price by 2% knowing you're going to pay with a CC.

Perhaps your best course of action would be to negotiate the price of the car, and bring both your CC and the authorization from your bank. If by some miracle they let you pay for the entire car with your CC, then great! If not, then finance it with the credit union. Beware of mixing them though. For example, if the dealer says you can pay $2K with a CC and the rest with the loan, your loan may end up being $2K less and then you'll have to be able to pay off the $2K within 30 days to avoid high interest on the CC.

As a side note regarding your comment about dealers hating cash purchases, that is definitely not universally true. In fact, most dealers prefer cash purchases since more than half of car purchases don't close because the financing falls through. If you have excellent credit and verifiable income, which apparently you do, then they may prefer to finance to you, but that is certainly not the norm.