The term straw purchase is normally associated with firearm sales. When the term is used in the car sales industry, it means when someone with better credit intentionally finances or leases a vehicle for someone who can not buy a vehicle because of bad or poor credit history. Laws differ state by state that may make the straw purchase of a vehicle illegal.
If you purchase a vehicle for someone and they're not on the loan, you're the only one ultimately responsible for paying back the loan. If they decide to quit paying for the vehicle, you either have to make the payment or risk seriously damaging your credit history for years to come.
If you have someone buy a car for you and you're not on the loan, it will not help you establish or improve your credit history. You will not gain anything by having someone else purchase a vehicle for you.
The straw purchase scam happens when a dealer has exhausted all avenues to obtain automobile financing for someone with bad credit and asks you if anyone can buy the vehilce for you.
Vehicle Straw Purchase Definition
The term "Straw Purchase" is normally associated with the purchase of firearm sales. This is when someone buys a firearm for someone whom is not allowed to purchase one themselves. This could be because of a prior felony or someone who is ineligible for any reason to own one.
When the term is used in retail automobile sales it refers to when someone with better credit purchases a new or used vehicle for someone who, because of bad credit, is unable to obtain financing.
It's very difficult to detect a straw purchase scam. The best thing you can do is to avoid it altogether. Laws differ state by state, some states may consider the straw purchase of a vehicle to be illegal.
How the Straw Purchase Scam Works
This scam can be attempted by either party, the customer or the dealership and its staff.
Straw Purchase Attempted By a Customer
A straw purchase is normally initiated by a customer who is attempting to buy a car for a friend or family member who is not able to buy a car because they have bad credit. A "reputable car dealer" will immediately terminate the deal or refuse to sell the car if they become aware of the situation.
When a dealer sells a vehicle to someone that's buying the car for someone else to drive violates standing dealer agreements with the dealerships banks and lending institutions.
Straw Purchase Attempted By an Unethical Dealership
You go to a car dealership to buy a new or used car. The dealer tells you because of your bad credit history there's no way you he can get you financed on your own. He tells you to find a co-signer that's willing to help you qualify for a car loan.
The dealer continues to tell you by getting a co-signer you'll also be able to establish some positive credit history to balance out the bad. At this point, the dealer already knows by looking at your poor credit history, even with a strong co-signer you're never going to get approved for the car loan.
Listening to what the dealer told you, you find a willing co-signer and head back to the dealership. There are typically three different ways the straw purchase scam can play out from this point:
Scenario One - This scenario is normally used if the dealer believes they have a pretty good rapport with the customer and goes something like this:
The dealer explains if you both go on the car loan your interest rate will be some outrageous number like 20% and your payments will be really high, like $692.00 a month or something.
However, if you don't go on the loan and only your co-signer with the great credit buys the car. The interest rate will be 3.9% and your payments will only be $325.00.
Scenario Two - The second scenario takes place if the dealer is unable to keep you from going on the loan or the deal ends up falling through with you on the loan even with a good credit co-signer. The finance manager will wait a few days or even a week to call you and tell you your financing has fallen through.
He explains to you that you must bring the car back immediately and they must charge you for the miles you've put on the vehicle. They may even threaten to keep your trade-in.
You ask what you can do to keep the car and the dealer tells you there is no way to keep the car with you on the loan. However if your co-signer wants to buy a car he could actually buy the car if it was only in his name.
Now pay close attention what's going on here. The dealer isn't coming right out and telling you to have your co-signer buy the car for you. Doing that may be illegal in some states. However, the dealer is coaching you to get the co-signer to just buy the car for you only in his name.
Scenario Three - The third scenario of the straw purchase scam is pretty deceitful when done by a car dealer. This is when the co-signer comes to the dealership and is deceived by the dealer's staff during the signing process of the paperwork.
The dealer will have extra paperwork or several of the same forms written different ways, making excuses; they may need it to get your car deal approved.
They will then rush you and your co-signer through the paperwork process and attempt to confuse your co-signer and mislead them into signing as the primary signer and all the other paperwork is later sent through the shredder. I know it sounds farfetched but I'm telling you it happens.
You end up finding out a month or so later the dealer never added you to the car loan. Usually when your co-signer gets a bill in the mail for the first payment and your name is nowhere to be found on it.
As I said before, laws are different from state to state. It's very difficult to prove you have been duped into a straw purchase scam. One of the major reasons is because it's the co-signer's signature on all the documents and your papers have been sent through a shredder.
The best way to avoid the straw purchase scam is to only use a car dealerships financing as a last resort. Find out what you qualify for before contacting a dealership by arranging your financing beforehand. You'll know upfront how much money you can borrow and what interest rate you qualify for.
The best advice I can give you is to recognize the signs and avoid it in advance.
Visit our section on how to get low interest car loans online to learn how to get free no-obligation car loan quotes sent to your email.
Having a pre-approved car loan in place gives you the upper hand when negotiating a loan with a dealership. You can check the most current rates with your bank, credit union, or for the best rates get pre-approved with an online company such as myAutoloan and LightStream.
How to Avoid The Straw Purchase Scam
- Don't let a dealer know more about your credit history than you do. Review your credit reports and scores before applying for a car loan. Read my chapter on how to get your credit reports online.
- Ask the dealer to show you the approval letter from the lender. It should have both names to show proof that you're both on the loan. If it only shows one name, the person named is the only one approved for the loan.
- Use reputable online financing companies like myAutoloan.com or Up2Drive to get pre-approved. You can use these companies free car loan quotes to use as leverage against a dealerships finance department. If you have bad credit, learn how to get an online bad credit loan.
- Never sign more than one contract at a time. If you must sign another contract at a car dealership for whatever reason, make absolutely sure you rip up the first contract personally BEFORE signing another one.
- The Federal Trade Commission's Trade Regulation Rule on Credit Practices requires a Notice to Co-signer form to be included with any motor vehicle retail installment contract or motor vehicle lease contract that has a signer and co-signer involved.
- Always have both people together at the dealership, at the same time. Agree to meet at the dealership at a certain time and agree with each other not to sign anything until you're both together.
- The Notice to Co-Signer form notifies the co-signer they are equally liable for the debt if the signer does not fulfill the responsibilities of the contract. The co-signer should get a copy of this form and read it thoroughly before signing it. After it's signed keep a copy.
- Last but not least. If your credit is bad enough to require a co-signer to buy a car you may want to bite the bullet and look at some other alternatives. The worst thing you can do to yourself is stack on more debt by buying a car. Look into buying a cheap used car until you can re-establish your credit and get back on your feet.
What to do if You're the Victim of a Straw Purchase Scam
If you believe you're the victim of the straw purchase scam you can file a complaint with your State's Attorney General's Office and/or the Better Business Bureau. This will hopefully make others aware the of the deceitful car dealer and its employees. If a dealer gets enough complaints they will be investigated.
Since the laws vary from state to state you may want to speak with an attorney to find out what legal recourse you have. When it comes down to it. The dealer has a copy of all the required paperwork with only one signer's name and it's not yours.
It's very difficult to detect the straw purchase scam and may be a very expensive, long and drawn out process to get a verdict.
Your best defense is to always have both signers at the dealership at the same time, recognize the signs and to avoid the straw purchase car dealer scam at all costs.
Continue to familiarize yourself with other common car buying scams.
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