It's a Scammer's Market in Car Financing - Don't Become a Victim

As if the car buying experience wasn’t bad enough, it has become a nightmare for many unwitting car buyers who, for one reason or another, aren’t able to use conventional means to finance their purchase. Along with the dozens of other scams that have proliferated in the wake of the financial crisis that has many consumers trapped by their deteriorating credit standings, there is no shortage of scams emerging in the car sales arena. The many different types of scams are too numerous to cover in this limited space, but we highlight the three most prevalent:

Buy Here, Pay Here Dealers

With conventional financing harder to come by for people with checkered credit histories, a whole new industry of buy here, pay here dealers has emerged, targeting the very people who can least afford to get caught in their scheme. These dealers promote “drive-away financing” that doesn’t involve any third-party lending institution; instead, it is strictly dealer financed. The terms are always atrocious, and they only apply to used cars that would never make it on to a legitimate car dealer’s lot. In addition to paying a high dealer markup, the car buyer is corralled into a high-interest loan that often requires payments to be hand-carried to the dealer each month. The dealers know that a third of the buyers will never be able to maintain the high payments. So, repossessions constitute a significant part of their scheme because they can resell the very same car, they sold months earlier.

Auto Loan Yo-Yo Financing

This scam happens more than you would think, even among “legitimate” car dealers. Again, the target is usually those car buyers with less than good credit and who are vulnerable to too-good-to-be-true offers. It plays out like this: the finance person reviews your credit application and sees that you would not qualify for a low-interest loan. But, because the final terms of the purchase are not final until the loan is approved, the dealer takes your down payment or trade-in and lets you drive off of the lot under the “temporary” terms of the low-interest loan (Yo). You then receive a call from the dealer that your loan wasn’t approved and, either the car has to be returned (Yo) or you agree to a loan with a higher interest rate. If you try to return the vehicle, you are not likely to get your down payment or your trade-in back.

While this may appear to be a legitimate mistake on the part of the dealer, and totally within their rights based on the terms of the agreement, it’s a scam through and through. Car dealers are fully capable of running your credit report and determining whether your loan will be approved, even if they have to shop it around to other lenders. So buyers at the end of the Yo-Yo string don’t get there by accident.

Loan/Lease Payoff Offer

You see these offers everywhere. Many of the car ads you hear on the radio or see in print will shout it out: “WE WILL PAY OFF YOUR CURRENT LOAN OR LEASE NO MATTER HOW MUCH YOU OWE!” That can sound very enticing if you are “upside-down” in their current loan – that is, owing more than the car is worth. They can’t simply make your existing loan magically disappear. Although they will use your trade-in to pay off the loan, with a sleight of hand, they simply slide the amount of the payoff onto your new loan with them. The new loan payments are spread out over five or six years, so you may not realize any increase, but the reality is that you just doubled your total debt obligations. The likelihood is that you will soon find yourself upside-down again, sometimes as soon as you drive off the lot.

How to Avoid Car Finance Scams

Simple. Don’t finance your car purchase with a dealer. That’s good advice, even if you have excellent credit. The best course is always to get your financing arranged before you start to shop for a car. It puts you in a much stronger negotiating position, and you won’t be tempted with any shifty financing deals. People with less than good credit might be able to find financing through a local credit union that is more than willing to work with its customers. It’s always best to save as much as possible to maximize your down payment (of course, it’s even better to save enough to pay for your car in cash). If you have to borrow from relatives or sell other property to raise money, anything is better than getting caught in the claws of unscrupulous, profiteering schemers.