While scammers targeted homeowners during the housing downturn, car loan scams are now beginning to grab the attention of government watchdogs. These scams range from illegal financing tricks that force consumers into unfavorable financing agreements to deceptive negative equity deals that leave consumers on the hook for more auto loan debt than expected.

Often scammers target car owners who need to catch up on their payments and want to avoid getting their cars repossessed. These scams can be costly, so understand the signs to watch out for. 

Car loan modification scams 

A car loan modification scam is a fraud designed to take your money without providing a service. Car loan modification scammers promise to lower your auto loan payments. In exchange for helping you accomplish this goal, they charge a steep fee upfront. Scammers typically ask for fees upfront or unusual forms of payment. They may also pressure you to sign a contract and will often skip checking your credit score.

The scammers may tell you to stop making auto loan payments while they “negotiate” with your lender. It’s also not unusual for scammers to ask for more money while continuing their so-called efforts on your case. And in some cases, the scam company may ask you to make car payments directly to it instead of your lender.

“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 Federal Trade Commission.

Repossession can occur after just two or three months of non-payment. The longer you wait to call, the fewer options will be 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.”

Car Outline
How to avoid
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. And ignore any too-good-to-be-true promises of lowered car payments from suspicious companies.

Yo-yo financing scams

A yo-yo financing scam dangles a good interest rate in front of a buyer, then yanks it away to make the already-committed buyer agree to worse terms.

Here’s how it works. 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. The buyer must come back and sign a new contract, typically with less favorable terms. 

Sometimes the dealership has already sold the trade-in vehicle, leaving the buyer to choose between higher rates or no car at all.

These scams often target consumers with fewer financing options because they have bad credit or no credit profile.

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.

The FTC is currently drafting a new set of proposed rules for car dealers that includes language to protect consumers from yo-yo financing traps. If enacted, the rule would prevent dealers from misrepresenting when the transaction is actually finalized.

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

Negative equity scams

The FTC has taken administrative action against multiple dealers for Truth in Lending Act violations regarding how those dealers handled negative equity. The dealers did not clearly explain to consumers that though they offered to “pay off” the balance due on a trade-in, they actually took the negative equity and applied 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,” Ashe says. “If you don’t understand something, then don’t sign it.”

Car Outline
How to avoid
When you review your loan documents, check to make sure the price is what you agreed to pay. If there are additional costs, ask the finance manager at the dealership to explain them to you. Your trade-in should be treated as a separate transaction. While you can choose to roll over negative equity into a new loan, the dealer needs to make it clear how that will affect your loan.

Loan packing

Dealers may make you feel pressured to purchase additional products and services when you buy a car. These might include an extended warranty, gap insurance, rustproofing, tire rotation and service contracts.

While some of these items can be useful, many are not. The dealer’s primary goal at this point is to get you to spend more money. But remember that you are under no obligation to agree to any add-ons. If some of the options interest you, try to negotiate the price for the extra item just as you would negotiate the price of the car itself.

Remember, when it’s added to the loan, you’re paying interest on it.

Car Outline
How to avoid
Research what is being offered and see what you can do yourself or get done at a shop elsewhere. You may find that you can get the services or options at a lower price and better quality without wrapping them into your loan.

The bottom line

Car loan modification scams 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.