Everything you ever wanted to know about the "Cosigner Loans Car Dealer Scam" but didn't know who to ask. This section of I'll show you how to recognize and avoid this clever car dealer scam.
The Auto Cheat Sheet has had a lot of readers inquire about this technique dealers still use to this day. The cosigner scam is similar to the straw purchase scam. It can present itself when attempting to buy a new car from a dealership or buying a used car also.
The cosigner loan scam not only affects the cosigner it also affects the actual buyer of the car. The person cosigning believes they're helping out a close friend or family member buy a car while helping them build and re-establish positive credit history.
The actual buyer is unknowingly removed from the loan and the cosigner becomes the sole buyer. The cosigner is now left with all the responsibility of repaying the loan and the actual buyer ends up not building any credit history or gaining anything from the transaction.
What is the Cosigner Loans Scam
This is when a customer tries to qualify for a car loan but does not have the credit history to do so. The salesperson will ask the customer if they have a family member or friend, with good credit, help them buy the car, or cosign.
When the cosigner gets to the dealership, the salesperson may tell them they're only signing with the buyer as a reference, only to help the signer to establish their credit. This is not true.
If you cosign on a loan you're taking on the exact responsibility as the signer.
The actual scam is when the buyer is unknowingly removed from the loan and the cosigner is the only one on the car deal.
This car buying scam occurs frequently in car dealerships across the Nation. It has a lot of the same characteristics and is very similar to a straw purchase and it usually starts with the spot delivery car dealer scam.
Read my article on how the finance process works in a dealership to familiarize yourself on how car dealerships make money during the finance process of buying a new or used car.
How the Cosigner Scam Works
Just like most car buying scams there are several different variations of how the cosigner loan scam is committed on unsuspecting car buyers. Here are a few of the most common ways this scam may be pulled on you.
1) Spot delivered by the dealership
The most common is when a car dealer knows upfront your credit history is so bad, there's no way you'll qualify for a car loan on your own. The dealer will make you believe you've been approved and everything is great. They'll have you sign the contract and paperwork and let you take delivery of your new car.
You'll leave the dealership believing you bought a car and go about your life. After a few days, you're called back by the dealer and told your financing fell through. You either need to bring the car back or find a cosigner with great credit to go on the loan with you..
If you find a cosigner, you'll have to go back to the dealership and resign the paperwork. This is where you will be susceptible to the next two scenarios.
If you can't produce a cosigner. The dealer will either try to switch you to a cheaper car you can qualify for on your own, or you will be sent home on the "hush puppy express"(walking).
2) The actual buyer is kicked off the car loan
This technique also works when the car dealer knows, upfront, there's no way the actual buyer can be on the car loan no matter how good the cosigners credit is.
The dealer will deliver the car with both the you and your cosigner on the contract. The dealer will allow the car to be driven by you for a few days, or longer, in hopes that you will not want to give the vehicle back.
After a week or so the dealer calls and explains to you they were unable to get the car loan approved with you on the loan. However, they were able to get the car loan approved using only the cosigners information and credit history.
The dealer is hoping enough time has passed and you've "fallen in love" with the vehicle. The dealer is also hoping you will pull on your cosigners "heart-strings" to sign for the car on their own so the dealer won't take the car away from you.
3) Signing multiple contracts and the paperwork shuffle
Last but not least is having you and your cosigner sign multiple sets of paperwork. The finance manager will have you sign a contract and a set of paperwork by yourself and then have the cosigner sign their own contract and paperwork also.
The finance manager may have both parties sign the title application or other fake forms for show and effect. Signing the title app will make it appear you're on the title and registration and your legit. However you will not get any positive credit, just parking violations.
To keep you or the cosigner from complaining or threatening a lawsuit because you're not on the car loan at a later date. The finance manager will not give any copies to you, the buyer, and run any documents signed by you through the shredder as soon as you take delivery of the car.
How to avoid the Cosigner Scam
- Have a good idea of how the auto finance process works. If you'll be financing a vehicle, you should have this arranged before visiting a dealership. You can read more about how to finance a new or used vehicle in my automotive finance section.
- Don't let the finance department know more about your credit history than you do. Know your credit history before visiting a car dealership. Get and review your personal credit reports and scores from a reputable online company such as myFreeScoreNow before applying for any kind of car loan.
- Only finance a car with a dealership as a last resort, use reputable online financing companies to get a pre-approved auto loan online before contacting a dealership. You can use these companies free car loan quotes as leverage when negotiating interest rates with a dealerships finance department. If you have bad credit or no credit at all, read my section on bad credit auto loans to learn how to increase your chances of being approved for a pre-approved auto loan.
- Always have both parties at the dealership to sign paperwork at the same time. Never sign paperwork or contracts separately. You're opening yourself up to become a victim of the cosigner loan scam.
- Never sign more than one contract at a time. If you're asked to sign another contract. Make absolutely sure you see the one you signed before destroyed. Have them hand the contract to you and tear it up or take it with you to destroy it.
- Ask to see the auto lender's approval. This letter will have both your name and your cosigners name on it along with the approval requirements of your car loan.
- Carefully read everything you sign. Review the contract and make sure you're both on the assigned and in the correct spots, signer and cosigner.
- The Federal Trade Commission's Trade Regulation Rule on Credit Practices requires a Notice to cosigner form to be included with any motor vehicle retail installment contract or motor vehicle lease contract that has a signer and cosigner involved. The Notice to cosigner form notifies the cosigner they are equally liable for the debt if the signer does not fulfill the responsibilities of the contract. The cosigner should get a copy of this form and read it thoroughly before signing. After it's signed keep a copy.
- Keep and file all copies of any paperwork you've both signed pertaining to the purchase of a vehicle.
- Someone in need of a cosigner has already proven they can't or will not satisfy the requirements of a car loan. You may want to advise them to buy a cheap cash car and keep from acquiring any more debt instead of cosigning a car loan for them.
- Do not let anyone pull at your heartstrings. If you have any doubt, you should not cosign for any type of loan.
- You should only cosign for a loan if you're sure that you will be able to handle the added debt and can budget for the payment you're cosigning for. It is the cosigners responsibility if the signer defaults and leaves you liable for the vehicle.
Now that you know how to recognize and avoid the "cosigner Loan Car Dealer Scam." Familiarize yourself with other common dealer scams to protect yourself while buying a car from a dealership.
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