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How to detect a car loan modification scam

Close up of woman's hands on steering wheel
5m3photos/Getty Images
Close up of woman's hands on steering wheel
5m3photos/Getty Images
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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. They can be costly, so 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.

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. Repossession can occur after just two or three months of nonpayment. 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.”

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.

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.

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,” Ashe says. “If you don’t understand something, then don’t sign it.”

When you review your loan documents, check to make sure the price is what you agreed to pay. If there are any additional costs, ask the finance manager at the dealership to explain them to you. Your trade-in should be treated as a separate transaction, and 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, such as an extended warranty, gap insurance, rustproofing, tire rotation and service contracts when they buy a car.

While some of these items can be useful, may are not. 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 at a lower price and better quality without wrapping them into your loan. Remember, when it’s added to the loan, you’re paying interest on it.

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.

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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