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Essential Points to Remember
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Potential auto loan scams can occur at the dealership or post-purchase.
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Always meticulously review loan documentation before signing it and be mindful of any extra fees or add-ons.
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If you fall victim, you can report the fraud but recouping your money isn’t assured.
Consumer auto loan scams are increasingly coming under the microscope of government regulatory bodies. The Federal Trade Commission is setting its sights on handling fees and deceptive advertising practices. The in-development Combating Auto Retail Scams (CARS) Rule is expected to protect consumers by controlling unnecessary fees and curbing false advertising on car prices and auto loan rates.
Often, fraudsters will target vehicle owners who are behind on their payments and hope to avoid repossession. Other times, scams occur directly at the dealership. These scams can be quite costly, so it’s important to know what signs to look for.
Automobile Loan Modification Scams
Auto loan modification scams lure you in by promising to reduce your car loan payments for a hefty fee. Scammers often ask for upfront payment or request unconventional means of payment, such as through a money transfer or gift cards.
Unlike reputable lenders, these fraudulent individuals often do not check your credit score and may pressure you into signing a contract.
“The tactics used in these scams mirror those used in mortgage loan modification scams, with fraudsters assuring customers that they could prevent their car from being repossessed and that they could lower their payments,” explains Gregory Ashe, senior staff attorney with the Bureau of Consumer Protection at the Federal Trade Commission.
In a car loan modification scam, the scammer pretends to negotiate on your behalf to reduce your rate — and may even ask you to make your car payments to them instead of to your lender.
Be wary and negotiate terms exclusively with your lender’s customer service team. As Ashe indicates, a lender may be willing to extend your loan term or delay some payments, but they are unlikely to negotiate on interest rates.
It is key to note that repossession can occur after just two or three missed payments. The longer you delay contacting your lender, the fewer options you will have.
How to Avoid Falling Victim
The FTC advises directly contacting your lender as soon as you realize you won’t be able to make your car payment. Be wary of any companies making promises that sound too good to be true about lowering your car payments.
Yo-yo Financing Scams
In a yo-yo financing scam, the dealer leads you to believe your financing is finalized, and they accept your trade-in and down payment before letting you leave the dealership.
Days or even weeks later, the dealer contacts you to say the financing didn’t work out. To keep the vehicle, you must return and sign a new contract, usually under less favorable terms.
Sometimes, the dealership has already sold your trade-in vehicle, forcing you to choose between higher interest rates or not having a car at all.
These scams commonly target consumers with fewer financing choices, such as those with a poor credit or no credit.
Yo-yo financing is illegal in every state, according to Paul D. Metrey, executive vice president for public policy with the National Automobile Dealers Association. However, practices such as conditional sales and spot deliveries remain legal.
The FTC’s CARS Rule, set to become effective on July 30, 2024, includes provisions to protect consumers from yo-yo financing scams by prohibiting dealers from misrepresenting transactions asBeing underwater on your auto loan refers to when the remaining balance on your car loan surpasses the actual worth of the vehicle.
The FTC has undertaken administrative measures against a number of dealers for breaking the Truth in Lending Act by not adequately elucidating how they managed negative equity to their customers. These dealers promised to settle the remaining balance on a trade-in but rolled over the negative equity into the new auto loan balance without clear communication.
Several customers complained they were unaware of this until after they had signed their new auto loan agreement.
As Ashe advises, “Customers should meticulously read the agreement before affixing their signature. Regardless of verbal exchanges, the written agreement takes precedence. If something is unclear, refrain from signing it.”
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Steps to avoid
While reviewing your loan agreement, ensure the price is as per your earlier mutual understanding. If you find any additional costs, solicit an explanation from the finance manager at the car dealership. You should regard your trade-in as a separate deal altogether. Yes, you can choose to roll over negative equity into a new loan, but it is essential for the dealer to elucidate how it will impact your loan.
The concern of Loan Packing
Dealers often try to coerce customers to acquire additional services or products when purchasing a car. These may encompass:
Although a handful of these propositions could be of value, many are superfluous. The dealer’s primary objective is to encourage you to spend more.
You are in no way obligated to concur with these add-ons. If an option piques your interest, negotiate a price for added benefits.
Remember, with each add-on to the loan, you are paying an additional interest fee. Examine your contract meticulously before signing it.
The newly implemented CARS Rule will ease this process by necessitating dealers to procure your “explicit, informed consent” prior to adding any extra charges for services or products to your invoice. However, dealers might attempt to flout this rule, so always be alert.
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Avoidance techniques
Perform thorough research regarding what is being offered and ascertain whether you can acquire the same product/service externally, or if you can perform it yourself. You might find that external sources provide these services or options for a better deal without having to include them in your loan.
Measures if you become a victim of auto loan fraud
While buying a car, thoroughly review your loan contract and request the sales representative to clear any doubts you might have.
You can choose from numerous dealers, both virtual and physical, that offer similar cars. If the dealer is reluctant to answer your queries or pressurizes for a signature, retreat. There are always other options available. You can also submit a complaint to the Consumer Financial Protection Bureau (CFPB).
If you think you have been scammed, the FTC describes the measures you can take based on the information the scammer possesses. You can also report the fraud and contemplate your subsequent steps.
The Ultimate Takeaway
Car loan modification scams primarily aim at potential buyers with unfavorable credit or those who have delayed their payments. If the deal sounds too good to be true, it likely is.
If you’re struggling with loan payments, the ideal course of action would be to contact your lender directly. Lenders are often willing to cooperate if you demonstrate a sincere attempt to keep making payments.
When looking to purchase a car, solicit deeper information. Review every document thrust upon you. The ideal defense against any harmful practices is staying alert and choosing to shop elsewhere.
