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How to detect a car loan modification scam

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While scammers targeted homeowners during the housing downturn, car loan scams are now beginning to grab the attention of government watchdogs. These scams often target car owners who are behind on their payments and looking to avoid getting their car repossessed. These scams can be costly, so it’s important for you to understand the signs to watch out for. 

Watch for signs similar to mortgage scams 

“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 FTC (Federal Trade Commission). 

Ashe says the scammers typically will tell consumers to stop paying their car payment and to not talk to their lender. The scammers say they will be in touch with the auto financing lender, but they do nothing or make only one initial contact. Repossession can occur after just two or three months of nonpayment. 

To avoid becoming the victim of a car loan modification scam, the FTC recommends contacting your lender directly as soon as you realize you will have trouble making your car payment. The longer you wait to call, the fewer options you’ll have available. 

“Auto lenders are not typically lowering interest rates or reducing the principal balance on a car,” Ashe says. “If any relief is to be had, it’s typically to extend the term of the loan to reduce your monthly payments or to defer missing payments to the end of the loan. You’ll pay more over the life of the loan, so there’s no real savings — but at least you have a chance of affording your car payments.” 

While the FTC has focused attention on loan modification scams, some car loan scams target consumers at the beginning of the car buying process, too. 

Yo-yo financing scams 

One upfront auto loan scam is a yo-yo financing scam. This occurs when a car dealer leads a buyer to believe that the financing is final, accepts a trade-in or a down payment and allows the buyer to leave the dealership with a new car. 

Days or even weeks later, the dealer will call the buyer and say the financing fell through and the buyer needs to come back and sign a new contract, typically with less favorable terms. These scams often target consumers with fewer financing options because they have bad credit or no credit profile. 

“If the financing doesn’t go through, the dealer may require you to secure other financing at a higher interest rate or ask you to return the car,” says Christopher Kukla, a senior markets and policy fellow at the Consumer Financial Protection Bureau. “The dealer can charge you for wear and tear on the car or even a daily rental fee for the period you’ve had the car if you choose not to refinance.” 

Yo-yo financing is illegal in every state, says Paul D. Metrey, senior vice president for regulatory affairs with the National Automobile Dealers Association in McLean, Virginia. But there are also conditional sales and spot deliveries that are perfectly legal. 

To avoid a yo-yo scam, buyers can come to the dealership with financing secured ahead of time. You will likely be able to get a better interest rate with a bank or credit union you already have an account with. Plus, walking in with financing already locked down gives you additional negotiation power 

Kukla says consumers should also realize they have the right to take home the financing documents to read before signing them. “Also, you can tell the dealer you won’t take the car home until the financing is final,” Kukla says. 

Negative equity scams 

The FTC took administrative action against four dealers for Truth in Lending Act violations because those dealers did not clearly explain to consumers that when they offered to “pay off” the balance due on a trade-in, they were actually taking the negative equity and applying it to the borrower’s new car loan balance. Some customers complained that they didn’t know this until they signed 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,” says Ashe. “If you don’t understand something, then don’t sign it.” 

Loan packing 

Kukla says consumers often feel pressured to purchase additional products, such as an extended warranty, gap insurance, rustproofing, tire rotation and service contracts when they buy a car. 

“Some of these items are beneficial, and some are not,” Kukla says. “The dealer will offer to wrap these items into your loan, but they may be cheaper elsewhere.” 

Kukla recommends that car buyers do their research and take the dealer’s offer home to compare it to pricing available from a credit union or bank. 

“We’ve gotten used to buying a car the way we buy everything else, buying it and taking it home the same day,” Kukla says. “Consumers should always take advantage of their right to take their time.” 

The bottom line 

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


Written by
TJ Porter
Contributing writer
TJ Porter is a contributing writer for Bankrate. TJ writes about a range of subjects, from budgeting tips to bank account reviews.
Edited by
Auto loans editor