The Vehicle Straw Purchase Car Dealer Scam
The term straw purchase is typically associated with firearm sales. 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 car because of inadequate or poor credit.
A straw purchase is prohibited and can cause problems for buyers, sellers, and lenders. I’ll go through the components of a vehicle straw purchase and additional choices for purchasers with bad credit.
What is a Vehicle Straw Purchase?
The term “Straw Purchase” is typically associated with the purchase of firearm sales. It is when someone buys a firearm for someone who is not allowed to purchase one. The reason could be a prior felony or someone ineligible for any reason to own one.
When the term straw purchase is referred to in retail automobile sales, it refers to when someone with better credit purchases a new or used vehicle for someone unable to obtain financing because of bad credit.
If you purchase a vehicle for someone not a signer on the auto loan, you’re ultimately responsible for paying it back. If they decide to quit paying for the car, 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 an auto 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.
It’s challenging 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 illegal.
How the Straw Purchase Scam Works
This scam can be attempted by either party, a customer attempting to buy a car for someone else or an unethical dealership trying to make a sale.
The customer attempts a vehicle straw purchase.
A straw purchase is typically initiated by a customer attempting to buy a car for a friend or family member who cannot 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 buying the car for someone else to drive violates standing dealer agreements with the dealership’s 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 they can get you financed on your own. He tells you to find a cosigner willing to help you qualify for a car loan.
The dealer continues to tell you by getting a cosigner; 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 that you’ll never get approved for the car loan, even with a strong cosigner.
Listening to what the dealer told you, you find a willing cosigner and head back to the dealership. There are typically three different ways the straw purchase scam can play out from this point.
Common Dealer Straw Purchase Scenarios
Unethical dealers can set you up for this scam in many different ways. Below are the three most common scenarios.
Dealership straw purchase scenario #1
This scenario is typically used if the dealer believes they have a pretty good rapport with the customer and goes something like this:
The dealer explains that if you both go on the car loan, your interest rate will be outrageous, like 23.95%, and your payments will be high, like $892.00 a month for 72 months or something.
However, if you don’t go on the loan and the signer with the excellent credit buys the car. The interest rate will be 3.9%, and your payments will only be $325.00. As you can see, that is a pretty easy manipulation regarding needing a car to drive.
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 that you’ll never get approved for the car loan, even with a strong co-signer.
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 #2
The second scenario occurs if the dealer cannot keep you from going on the loan or the deal ends up falling through with you on loan even with a good credit co-signer. The finance manager will wait a few days or even weeks to call you and tell you your financing has fallen through.
He explains 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 go as far as threatening 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 vehicle with you on loan. However, your co-signer could buy the car, but it would have to be purchased only in their name.
Now pay close attention to what’s going on here. The dealer isn’t coming 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 purchase the vehicle for you only in his name.
Scenario #3
The third scenario of the straw purchase scam is 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 paperwork signing process.
The dealer will have extra paperwork or several of the same forms written differently, making excuses; they may need all of it to see which way will be the best way to get your car deal approved at the lowest interest rate.
They will then rush you and your co-signer through the paperwork process, attempt to confuse your co-signer, mislead them into signing as the primary signer and send all the other paperwork through the shredder. I know it sounds farfetched, but I’m telling you, it happens.
You find out a month or so later that 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 difficult to prove you were duped into a straw purchase scam.
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 prove that you’re both on loan. If it only shows one name, the person named is the only one approved for the loan.
- Use reputable online financing companies to get pre-approved. You can use these companies’ free car loan quotes as leverage against a dealership’s 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 sure you rip up the first contract personally BEFORE signing another one.
- According to the Federal Trade Commission’s Trade Regulation Rule on Credit Practices, each motor vehicle retail installment contract or motor vehicle lease contract with a signer and co-signer must contain a Notice to Co-signer form.
- Always bring both folks to the dealership at the same time. Agree to meet at the dealership at a specific time and agree not to sign anything unless you’re both present.
- 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 other alternatives. The worst thing you can do to yourself is stack on more debt by buying a car. Look into purchasing a cheap used car until you can re-establish your credit and get back on your feet.
What if You’re a Victim of the Vehicle 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 or the Better Business Bureau. This will hopefully make others aware of the deceitful car dealer and its employees. If a dealer gets enough complaints, the authorities will investigate them.
Since the laws vary from state to state, you may want to speak with an attorney to determine your legal recourse 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 tough to detect the straw purchase scam, and it may be a costly, long, and drawn-out process to get a verdict.
Your best defense is always to have both signers at the dealership simultaneously recognize the signs and avoid the straw purchase car dealer scam at all costs.
Further Tips and Advice
Further tips and advice on the vehicle straw purchase scam:
- The best way to avoid the vehicle straw purchase scam is to recognize the signs and prevent them in advance.
- Get and review your credit report and score. Don’t let the person deciding your interest rate know more about your credit history than you do.
- Do not cosign for anything if you cannot make the payments and fulfill the contract’s obligations.
- Only use 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 how much money you can borrow and what interest rate you are eligible to receive.
- Familiarize yourself with 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 Auto Credit Express.
- You will not establish a credit history if you have someone finance a car for you. You will be in the exact situation you’re in now when it’s time to buy another vehicle.
- Read everything and have an excellent understanding before signing any paperwork.
- Visit my 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.
About the author
My name is Carlton Wolf, and I’ve been in the car business since 1994, both retail and wholesale. I created the Auto Cheat Sheet to better educate buyers about the deceptive sales practices used by many dealerships throughout the country. Please understand that not all car dealers are dishonest. However, you never know who you’ll be dealing with, though. I’m willing to share my knowledge and experience with anyone who listens. Keep in mind that I’m a car guy, not a writer.
