Auto loan scams can deprive consumers of their hard-earned money. Some of the most common auto loan scams include car title loan scams, change in auto loan term scams, yo-yo financing scams, credit score scams, car loan fee scams, cosigner scams, and guaranteed loan scams.
Auto loan scams can occur online and at car dealerships. Below, learn about some of the most common auto loan scams plus tips on how you can avoid such scams.
Key Points
• Auto loan scams can target anyone, from car buyers to owners seeking title loans.
• Common scams involve changing terms, yo-yo financing, and credit score manipulation.
• Scammers often charge high interest rates or require upfront fees.
• Victims can report scams to state consumer protection agencies and the FTC.
• Avoid scams by knowing your credit score and securing preapproved financing from reputable lenders.
What Is an Auto Loan Scam?
An auto loan scam is an unfair, deceptive, or criminal practice that defrauds or takes advantage of car buyers who need financing. Auto loan scams can also target car owners who apply for car title loans. As mentioned above, auto loan scams can occur online and at car dealerships.
Auto loan scams can have a damaging impact on consumers. These scams may result in car owners paying exorbitant rates of interest or being required to return their vehicle while being denied a refund of their down payment.
How Do Car Loan Scams Work?
Car loan scams work by taking advantage of consumers who want to borrow money. Any car owner who applies for car title loans could become a prime target of such a scam, and consumers who need financing to purchase a new or used vehicle could also become a target.
These scams could exploit consumers who may not be aware of their credit scores or aware of any state laws against predatory lending. Scammers may also target consumers who sign auto loan contracts without reading the documents or understanding the terms and conditions.
Auto loan scams can give car dealers unfair leverage over their customers and may cause customers to pay exorbitant rates of interest.
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Car Title Loan Scam
Car title loan scams may exploit motor vehicle owners who borrow money from car title loan lenders. Borrowers in this scam may sign car title loan agreements that include exorbitant rates of interest.
Perpetrators of this scam may impose interest rates exceeding 100% and may seize the vehicle as collateral if the borrower fails to repay the loan in full. At least 32 states plus the District of Columbia cap interest rates at 36% or less for $2,000 installment loan products.
Change in Auto Loan Term Scam
A change in auto loan term scam is an unfair practice in which lenders change the terms and conditions of a loan agreement after a borrower secures financing for a vehicle. Lenders may promise certain terms and conditions when selling the vehicle then later inform borrowers that they no longer qualify for the favorable loan terms.
Lenders who deploy this scam may offer new loan terms calling for borrowers to pay higher rates of interest as a condition of keeping the vehicle. Borrowers who refuse to pay the higher interest rate would be asked to return the vehicle.
Yo-Yo Financing Scam
Yo-yo financing scams occur when consumers buy a vehicle from a dealership that fails to honor the financing agreement. Dealers in this scam may contact borrowers days later and tell them that their auto loan financing application did not go through.
Car buyers in this scam are asked to return the vehicle, and these customers may also be denied a refund of their down payment. After the car buyer returns the vehicle, the lender may ask the customer to consider buying a different vehicle at a higher rate of interest.
Credit Score Scam
A credit score scam occurs when lenders of auto financing give false or misleading information about a consumer’s creditworthiness. Lenders in this scam may tell borrowers that their credit scores are too low to qualify for the best interest rate even if the borrower has good or excellent credit.
Victims of this scam may be unaware of their good or excellent credit scores and therefore might not realize the lender is pulling a scam. Certain credit monitoring services can give consumers access to their credit reports and credit scores.
The way how auto loans work is that banks, dealerships, or private lenders offer a financing plan to help consumers buy a new or used vehicle. Lenders may offer the best rates of interest to consumers with excellent credit, but scammers may ignore creditworthiness when imposing unfair rates of interest.
Car Loan Fees Scam
Here are some car loan fee scams:
Packing Payments
A packing payments scam occurs when dealers inflate the overall price of an auto loan by adding extra products, including supplemental insurance packages, that can provide dealers with additional revenue kickbacks.
Upfront Fees
An upfront fee scam occurs when lenders ask consumers to pay advance fees before processing an auto loan application. Scams like this can occur online, and victims may never receive the loan and may never hear from the lender after paying the advance fees.
Cosigner Scam
A cosigner scam occurs when borrowers apply for an auto loan with cosigner assistance, but the lender ends up putting the entire loan in the cosigner’s name.
A car loan cosigner can help borrowers with poor credit qualify for an auto loan. If approved by the lender, the borrower and cosigner would share the responsibility of repaying the loan.
Guaranteed Loan Scam
The guaranteed loan scam occurs when dealers promise that borrowers will receive auto loan financing regardless of credit history and then offer outrageous terms and conditions for the loan.
A guaranteed auto loan offers financing to all car buyers, including consumers with poor credit. Lenders may charge higher rates of interest on borrowers with poor credit.
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Tips for Avoiding Auto Loan Scams
Here are some tips to avoid auto loan scams:
Get Independent Financing
Consumers can avoid dealer financing by shopping around for car loans from independent lenders who may offer preapproved car loans or car loan refinancing.
Know Your Credit Score
Knowing your credit score can help you avoid credit score scams. As mentioned earlier, certain credit monitoring services can give you access to your credit report and credit scores.
Blank Fields on Contract
Blank fields on a contract could signal trouble. Lenders may ask you to sign the paperwork without giving you time to read the contract, and then lenders could later insert language into the blank fields imposing unfair terms and conditions.
Unclear Interest Rate
Consumers can avoid signing auto loan contracts that fail to disclose the interest rate in clear language. A loan contract with an unclear interest rate could be a red flag.
Conditional Loan
Getting a preapproved or conditional auto loan before visiting a car dealership can help you avoid potential yo-yo financing scams. Once you find the car you want, financial institutions may finance the transaction with a fully approved loan agreement.
How Do You Know If You Have Been Scammed?
The following scenarios could point to an auto loan scam:
• The lender changes the terms of your loan without your consent
• You’ve paid upfront fees for financing and never received a loan
• The lender is charging you an exorbitant rate of interest
• The lender rushes you to sign a loan contract with blank fields
• You buy a vehicle and the dealer later asks you to return the vehicle or pay higher interest.
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What Can You Do If You Are a Victim of an Auto Loan Scam?
Victims of auto loan scams can file complaints with their state’s consumer protection agency and the Federal Trade Commission. Consumers with unfair auto loan terms may also file complaints with the Consumer Financial Protection Bureau.
What Should You Do If You Can’t Afford Car Loan Payments?
If you cannot afford making car loan payments, you may contact your lender as soon as possible and ask about possible relief options.
Lenders may be willing to negotiate a loan modification that could extend your repayment term and provide you with a lower and more affordable monthly payment. Refinancing may be an option as well. It’s likely you’d take out a new loan with lower monthly payments, but you’d probably pay more interest over the life of your loan.
If your circumstances change and you can afford to pay off your car loan early, that can improve your debt-to-income ratio and allow you to save on interest payments.
The Takeaway
Lenders who charge exorbitant rates of interest for auto loans could be predatory scammers. Other signs of a scam can include the rate of the loan changing unexpectedly or the lender having you sign a contract with areas that have not been fully filled out. Knowing the signals of a scam and being wary are good steps to take.
Auto loan consumers who cannot afford their monthly repayment obligations may consider auto loan refinance options.
If you’re seeking auto loan refinancing, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your car in minutes.
FAQ
How to avoid auto loan scams?
Consumers can avoid auto loan scams by knowing their credit scores and seeking preapproved financing from independent lenders before going to a dealership.
How to know if you’ve been scammed?
You may be the victim of an auto loan scam if the lender took advantage of you with an unfair or deceptive practice. One of the signs of a scam is the lender changes the terms of your loan without your consent. Paying upfront fees and getting nothing in return is also a red flag.
What can you do if you are the victim of an auto loan scam?
As mentioned above, victims of an auto loan scam may file complaints with their state’s consumer protection agency and the Federal Trade Commission. Consumers with unfair auto loan terms may also file complaints with the Consumer Financial Protection Bureau.
Photo credit: iStock/erdikocak
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