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Straw Purchase Scam

Last Modified: June 02, 2016 by Jeff Ostroff

How the Scam Works

We typically see more occurrences of this scam during times when interest rates are rising and fewer people are able to qualify for loans. This also happens to young car buyers just starting out who have not yet established their credit history. This scam is also pulled on people who have trashed their own credit through years of failing to pay their bills on time.

straw purchase

A straw purchase is a term typically used by police which traditionally referred to handgun sales to ineligible buyers. When one person buys a handgun for someone who is ineligible to own one, it's called a Straw Purchase, carrying stiff penalties. The same nomenclature applies to car buying, where someone co-signs a car loan at the dealer for a friend who cannot qualify on their own.

With the straw purchase scam in car buying, the dealer tells you that with your bad credit score, you will not qualify for a car loan. They then tell you that you need to get a co-signer, like maybe Grandma, to co-sign sign the loan for you so that you can get approved. A reminder, we here at CarBuyingTips.com have strongly urged buyers for years never to get involved with co-sign loans.

Likewise we even more strongly urge all you moms, dads, boyfriends and girlfriends never to cosign a loan for someone no matter how much you love them. You won't love them too much when they stop paying the car payments and you find out the hard way how co-signing that note has come back to bite you in the butt and now you are responsible for making good on those payments. This is particularly painful for boyfriends or girlfriends who have broken up. Now you're stuck with the pain long after you thought they were finally out of your life. We have seen this scenario too many times.

The sales sharks at the dealer are great at smoothing it over for car shoppers. They also tell you that it will help build your credit to have someone cosign the loan for you. No problem you tell them, Grandma will co-sign the papers for you. The dealer has run your credit history and they know your low credit score would not qualify for a loan, even with a co-signer. Now they must somehow trick Grandma into being the borrower, after all she probably has great credit.

Now here is where they start to pull their scam: Grandma is easily duped by the dealer during the entire fast paced paperwork shuffle and she's tricked into signing on the loan papers as the primary borrower. Not as the co-signer. This is the core of the Straw Purchase Scam. Weeks later you are horrified to learn the dealer did not process a co-sign loan as they promised, but rather the entire loan is in Grandma's name! Good luck trying to fix it. They have your signatures on the paperwork which you willingly signed and which you never scrutinize carefully before signing.

This car loan, since it is in Grandma's name and not yours, does not help your credit since it is in your name and the car dealer lied to you. It doesn't matter that you are the one who is making the monthly payments. State laws are very vague on the subject of vehicle straw purchases. Your best course of action is to become an educated consumer and steer clear of this iceberg.

How to Avoid the "Straw Purchase" Scam

You can avoid this scam by never cosigning a loan, which is our recommended course of action. If you are going to ignore our solid advice and still go through with this anyway, make sure both signers are present at the finance office at the same time to review the paperwork together.

You should have your signatures on the same contract. You should never sign separate contracts. There should be a separate line item for you and for your co-signer. Make sure your signatures go on the correct lines. Take the time to read through each line first, do not let them speed sign you through this process.

A notice to the cosigner is required by the Federal Trade Commission's Trade Regulation Rule on Credit Practices. You and the cosigner should ask for a copy of that before signing the papers. If the dealer refuses, or gives you any other excuse for not showing you this notice, then leave immediately.