How To Spot Auto Loan Fraud

Scammers often target car owners who need to catch up on their payments and want to avoid having their cars repossessed. Other types of scams happen at the dealership or when buying used through a private seller. Either way, these schemes can be costly, or even worse, leave you empty-handed. 

With a previous FTC rule designed to help consumers currently paused, it’s worth familiarizing yourself with the red flags to minimize the chances of falling victim to a scam. 

Car dealer scams

With a yo-yo financing scam, a dealer will lead you to believe the financing is final. It may accept your trade-in and down payment before allowing you to leave the lot.

Days or even weeks later, the dealer will call and say the financing fell through. To keep the vehicle, you must come back and sign a new contract, typically with less favorable terms. Sometimes, the dealership has already sold the traded-in vehicle, leaving you to choose between higher rates or no car.

These scams often target consumers with fewer financing options because they have bad credit or no credit profile.

Yo-yo financing is illegal in every state, says Paul D. Metrey, executive vice president for public policy with the National Automobile Dealers Association. But tactics like conditional sales and spot deliveries, in which you can take your car home before the loan is finalized, are perfectly legal. However, the CARS Rule includes language to protect consumers from yo-yo financing traps by forbidding dealers from misrepresenting transactions as final.

Car refinance scams

Car loan modification scams promise to lower your auto loan payments for a steep fee. Scammers typically ask to be paid upfront or request unusual forms of payment, such as a money transfer or gift card.

Unlike a legitimate lender, these scammers often do not check your credit score. They may also pressure you to sign a contract.

“The scams are similar to mortgage loan modification scams, with the scammers telling customers that they could stop their car from being repossessed and that they could lower their payments,” says Gregory Ashe, senior staff attorney with the Bureau of Consumer Protection at the Federal Trade Commission.

With a car loan modification scam, the scammer will “negotiate” on your behalf to lower your rate — and may ask you to make car payments to them rather than your lender.

However, you should only negotiate terms directly with your lender’s customer service team. According to Ashe, a lender may extend your loan term or defer some payments, but they are unlikely to negotiate interest rates. Check out our best auto refinance loans if you’re interested in changing your car loan interest rate.

Negative equity scams

Negative equity, also known as being upside-down on your auto loan, occurs when you owe more on your car than it is worth.

The FTC has taken administrative action against multiple dealers for Truth in Lending Act violations regarding how those dealers handled negative equity. The dealers did not clearly explain to consumers that though they offered to “pay off” the balance due on a trade-in, they actually took the negative equity and applied it to the borrower’s new car loan balance.

Some customers complained that they didn’t know this until after signing their new auto financing paperwork.

“Consumers need to carefully read the paperwork before they sign it, because it doesn’t matter what’s said. It matters what’s in writing,” Ashe says. “If you don’t understand something, then don’t sign it.”

Loan packing

Dealers may pressure you to purchase additional products and services when you buy a car. These might include:

• An extended warranty.
• Gap insurance.
• Rustproofing.
• Tire rotation and service contracts.

While some of these items can be useful, many are not. The dealer’s primary goal is to get you to spend more.

You are under no obligation to agree to add-ons. If an option interests you, try to negotiate the price and remember, if it’s added to the loan, you’re paying interest on it.

The new CARS Rule should make this process easier. Dealers will be required to get your “express, informed consent” before any additional charges for products or services are added to your bill. However, dealers may try to buck this rule, so stay wary.

Used car scams

There are several tell-tale signs of a used car scam. For starters, if the price point of a vehicle is far below the market value, what seems like the deal of a lifetime is likely a play to steal your hard-earned money. Here are some other red flags to look out for.

• Pushy sellers
  

  They rush you to make a decision, supposedly because the seller is on a tight timeline. Payment needs to be quick, and in the form of cash, a gift card or other untraceable method of transferring money. Once you do so, contact stops, and there’s no way to recoup your funds.

• Vehicle identification number (VIN) issues
  

  Scammers often attempt to sell vehicles with outstanding liens, indicating a balance owed. They may also swap the VIN plate on the dashboard after a major incident, like a flood, theft or total loss, to mask the true history of the vehicle. Either way, you end up without an actual vehicle or a headache once you pay.

• Fake photos
  

  Duplicate listings are also common when dealing with scammers. A quick online search could easily reveal several listings of the car you’re considering, each with varying price points and points of contact.

What to do if you’re targeted for auto loan fraud

When buying a car, review your loan contract and ask the sales representative to clarify any questions you may have. But if you feel like you’re being taken advantage of, you have options. 

• Move on. There are plenty of dealers, both online and in-person, that offer similar vehicles. Back out if the dealer won’t answer your question or pressures you to sign.
• File a grievance. You can also report a complaint to the Consumer Financial Protection Bureau (CFPB) if you believe the dealer is engaged in shady practices. 

If you’ve already made what you believe is a fraudulent purchase, the FTC outlines steps you can take depending on the information the scammer has. Be sure to: 

• Report the incident. Use the guidance found on the FTC’s website to report the fraud and determine your next steps from there.
• Seek legal counsel. After filing a report with the FTC, contact your state attorney general to notify them of the scam and learn more about your options.

Unfortunately, it may be challenging to recover your money after paying for a loan modification. But you may have some recourse if you were the victim of a predatory dealership. 

Bottom line

When shopping for a car, ask clarifying questions and review every document you are asked to sign. The best defense against red flags is taking your business elsewhere.

If you’re having trouble paying your loan, the best thing to do is talk to your lender directly. Car loan modification scammers target vulnerable buyers who have poor credit or who are late on their payments. If it sounds too good to be true, then it probably is. Lenders will often be willing to work with you if you show that you’re making an honest effort to continue making payments.