Yeah, I have pretty mixed feelings about it, too. I think either decision is justifiable and rational--feelings and emotions are not necessarily inappropriate considerations.
I guess the way I'd decide would be to figure out whether the discomfort about the arrangement outweighed the financial benefits. If so, go with your gut instinct. Everything doesn't have to be about the financial bottom line.
If you decide against it, just explain to him that it truly is a generous offer, and from a financial standpoint it makes sense, but that you are more comfortable feeling like you are taking care of your own car ownership.