I frequently hear from clients that they purchase a car with money borrowed from a parent, and that they hold title free and clear of all liens. When I explain that their creditors can get at their car even though they feel they owe their parents money they often propose that they now put a lien on the car in favor of their parents. Placing a lien on a car a significant time after the purchase can be deemed a fraudulent conveyance, and in bankruptcy, it could be reversed as a preferential repayment of a loan to an insider. If you are going to borrow money from a family member there are ways to make the transaction defensible against future creditor attack.
These family car loans usually take one of two forms. Either the parent writes a check to the child, the child deposits the check in his personal account, and then the child writes a check from his account to buy the car. This type of transaction could be viewed as an unsecured money loan to the child, and the parent is an unsecured creditor. The creditor would argue that the child used his own money to buy the car which money may have included funds received from the parent.
The better transaction is for the parent to pay the loan money directly to the car seller. In this way, the money never goes through the child’s personal account. The parent immediately gets a lien on the title. The money for the car is segregated and the amount of the car loan is certain. For creditor protection purposes I think this is the best way for family to finance a child’s car purchase.