In September of 2016 the Federal Trade Commission (FTC) officially charged several buy here pay here dealerships with using deceptive sales and financing practices that were unfair to the consumer. While the majority of bad credit auto dealers are fair and reputable, this is unfortunately not true for all of them. In order to protect themselves from unscrupulous buy here pay here dealerships consumers with credit problems need to be aware of the common auto financing scams.
Why You’re At Risk For A Bad Credit Auto Loan Scam
Unfortunately the fact that your credit is less than perfect is putting you at risk for an auto loan scam. Having bad or no credit will classify you as a “high risk” borrower and this means higher interest rates when you are approved for a loan. Finding a lending institution willing to approve you for a car loan is also putting you at risk for being taken in by an auto loan scam.
Not only are your borrowing options limited, after being turned down by other lending companies you are more likely to accept the first offer of approval.
Sometimes bad credit borrowers will sign the contract without even reading the conditions of the loan agreement, and this does include the fine print.
Common Auto Loan Scams for People with Bad Credit
After finally finding an affordable vehicle that meets your specifications and finagling with the salesman, you have made it to the financing office. While you might think that this is a positive thing, and in most cases it is, at a few buy here pay here lots this is when you really have to be paying attention. Almost all of the auto loan scams occur in the financing office. Here are some of the more common ones that you need to look out for.
Spot delivery scam
Also known as the “financing fell through” scam this one occurs when you are told that you qualified for a low interest rate and are handed the keys after you’ve signed on the dotted line. A few weeks later you are contacted by the dealership and told that your financing fell through, and there are two ways the situation can be resolved.
- You can return the vehicle to the buy here pay here lot.
- Sign another loan application with a significantly higher interest rate.
Unfortunately since you have signed the contract these are your only two options. In the fine print you will see a phrase stating that the terms of the loan agreement are subject to approval. You were never actually told that you were approved for the low interest car loan, only that you pre-qualified for a lower APR. Unfortunately the reason this scam is so common is that once the buyer has driven the vehicle off the lot they are more likely to make the higher monthly payments than return it and start all over again.
Lie about the borrower’s credit score scam
This scam usually only happens to borrowers that have a credit score right on the cusp of being below subpar. Your credit score not only determines your likelihood of being approved, but also your interest rate. When the financing department at the buy here pay here lot tells you that your credit score is lower than it actually is they can charge you higher interest rates. Unless you know your actual credit score you will never know that you are being scammed.
Forgot to pay off the trade-in scam
Being able to trade-in your old vehicle can reduce the down payment required for loan approval. In some cases it can even eliminate the down payment all together. While this is good news for prospective car buyers with bad credit that are also short on cash, you should be aware that this could also be a scam.
Some less than reputable buy here pay here car dealers promise to pay off the remaining amount owed on your trade-in, and this is when you need to be careful. Unless you have actually signed a contract that specifically states that the dealership is responsible for paying off the remaining balanced owed on the trade-in, you will soon find that you owe on two vehicles. Even if the dealership has your old vehicle, the original lender of the loan will still hold you responsible. Not only is this detrimental to your credit when you start missing loan payments, you could also end up with legal troubles. The best way to avoid this scam is to never use a vehicle you still owe on as a trade-in.
Straw purchase scam
This scam is surprisingly easy to fall for, especially if you have bad credit and have been repeatedly turned down for an auto loan. It also tends to happen more often when interest rates are high and fewer people are qualifying for car loans. The scam occurs when the dealership knows that you won’t be able to make the payments on your reported income, and pushes you to get a co-signer. Since the payments are higher than you are able to make, the loan becomes the responsibility of the co-signer. If they want to keep their credit scores above subpar the loan payments will be made on time.
Not only is this scam illegal, it is responsible for ruining friendships and destroying close family bonds.
Customer’s online lender bounces checks scam
Potential car buyers with poor credit are often finding that their chances of being approved is a little better when they go through an online lender. In some cases the interest rates can even be lower than those found at a traditional brick and mortar lender. When you are approved for a bad credit auto loan through an online lending company you will be issued a blank check with your ARP rate to present to the dealership. This is when the scam starts.
The majority of buy here pay here lots are more than happy to accept the check, but there are some that will insist that you have to purchase the vehicle with a loan through their financing company. The most common reason given is that the online lender is known for bouncing checks, and this is simply a lie. If any financing institution is issuing bad checks there will be public records of a federal indictment. The reason that these dealerships try to pull this scam is simple greed. They make more money when you accept financing through them. If this every happens simple leave the auto dealership and find one that is reputable.
Forced warranty scam
There are two ways this scam can occur, and both will end up costing you a lot of money.
- When you are signing the loan agreement papers you are suddenly told that you won’t be approved unless you purchase an extended warranty. Financing institutions will never require someone to purchase additional items for approval, it increases their risk of losing money on the loan due to a borrower’s inability to make the higher payments. All states do require proof of insurance before a vehicle is driven off of the lot. This is the borrower’s responsibility and up to their discretion on which company they use.
- The other way this scam can occur is when the warranty is added into the loan agreement without the borrower’s permission. Once the contract is signed you are stuck with the higher payments for insurance that you don’t want or need. This is just one more reason why it is important to always read the fine print.
Excess fees – dealer’s prep scam
This is another example of dishonest buy here pay here car dealerships trying to make extra money off of their unknowing customers. There are no fees associated with the dealer preparing or filing your paperwork, and this means that you should not be paying any extra charges. In most cases the excess fees are hidden in the loan agreement, which is why it is important to always read every line of the contract.
Cars sold “as is” scam
Most buy here pay here lots would never consider using this scam, but there are a few that will do almost anything to sell a vehicle. Purchasing a vehicle “as is” might seem like an affordable option, especially if you have bad credit but in most cases it ends up being an expensive mistake.
When a vehicle is listed “as is” it means that the dealership is not responsible for any problems that might need repairs. These vehicles do not come with any type of guarantee or warranty, and it really is a case of “buyer beware”. The majority of these vehicles have been in accidents or even flooded, and this means that you really aren’t getting a good deal for your money. The easiest way to avoid this scam is to never purchase a vehicle that doesn’t come with a warranty.
Come back and resign to lower your payments scam
It is hard not to fall for this scam, even if you are aware of the red flags. Being told that your payments are being lowered is hard to ignore, especially if it is because they’ve always been on time. Since this is true, it makes this seem less like a scam. It is even easier to fall for the scam when you actually see your lower payment schedule on paper.
You might be making lower monthly payments after resigning, but the length of the loan also increased.
In most cases this means that you are now paying more for your vehicle. The best way to avoid this scam is to remember that lending companies are always trying to make a profit, and will never offer you a “better deal” that would result in them losing money.
A Few Tips On Avoiding Bad Credit Auto Loan Scams
If you do have subpar credit there are a few things you can do to help protect yourself from buy here pay here auto loan scams.
- Avoid short term 72 or 84 month auto loans. While paying off your car quickly might sound appealing, you will be paying significantly higher interest on the loan. In some cases the interest rate has been as high as 21 percent, and this can make it difficult for some borrowers to make the monthly payments.
- Before you start shopping for cars or apply for an auto loan it is important to know your credit score. This will dramatically reduce your risk for being taken in by a dishonest car salesman. See what the average interest rate is for an auto loan in your city is with your credit score. This way you will know before you sign a contract whether or not you are getting a fair interest rate.
- It is important to read and understand every line on an auto loan contract, especially the fine print. Skipping over the agreement is one of the main reasons buyers get caught in an auto loan scam. Don’t be afraid to ask plenty of questions, and if the dealership can’t answer them then the loan might be a scam. It is always a good idea to have copies of the contract before driving off of the car lot in your new vehicle.
- Never rely on any verbal promise made at a buy here pay here lot, regardless of who makes it. A verbal agreement is not binding by law, and this alone is reason enough to always get everything in writing.
- One of the easiest ways to get caught in an auto loan scam is to drive the vehicle off the lot before financing is approved. Even though it might be difficult to wait a few more days to take possession of your new vehicle, in the long run you will be glad that you did. It is also important to never sign any contract before financing approval, regardless of what the car dealership says.
There Are Good Bad Credit Auto Loans
Even though there are a few dishonest buy here pay here car dealerships, the majority are fair and reputable. Proving this point a BHPH auto lot in Texas recently ran an ad for a “$700 Lemon”. In the ad everything that was wrong with the vehicle was listed, ensuring potential buyers knew exactly what they were in for.
While the majority of BHPH car dealerships won’t try to scam you, it is still a good idea to be aware of the common ones so you can protect yourself and your credit.