Key takeaways

  • You might be targeted for a car loan scam at the dealership or after your purchase.
  • Always thoroughly read loan paperwork before signing off, and keep an eye out for fees and add-ons.
  • If you're targeted, you can report the fraud but reclaiming your money isn't guaranteed.

Car loan scams are getting attention from government watchdogs. The Federal Trade Commission plans to tackle fees as well as bait-and-switch marketing. Once the Combating Auto Retail Scams (CARS) Rule is implemented, it should help buyers by limiting excess fees and banning misleading promotions on car prices and auto loan rates.

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

Car loan modification scams

Car loan modification scams promise to lower your auto loan payments for a steep fee. Scammers typically ask to be paid upfront or request unusual forms of payment. For example, they might request a money transfer or gift card.

Unlike a legitimate lender, these scammers often do not check your credit score. They may also pressure you to sign a contract.

“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.

With a car loan modification scam, the scammer will “negotiate” on your behalf to lower your rate — and may ask you to make car payments to them rather than your lender.

Be careful, and only negotiate terms directly with your lender’s customer service team. According to Ashe, a lender may extend your loan term or defer some payments. But lenders are unlikely to negotiate interest rates.

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

How to avoid
The FTC recommends contacting your lender directly as soon as you realize you will have trouble making your car payment. Ignore any too-good-to-be-true promises of lowered car payments from suspicious companies.

Yo-yo financing scams

With a yo-yo financing scam, a dealer will lead you to believe the financing is final. It may accept your trade-in and down payment before allowing you to leave the lot.

Days or even weeks later, the dealer will call and say the financing fell through. To keep the vehicle, you must come back and sign a new contract, typically with less favorable terms.

Sometimes the dealership has already sold the trade-in vehicle, leaving you 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, executive vice president for public policy with the National Automobile Dealers Association. But tactics like conditional sales and spot deliveries are perfectly legal.

The new CARS Rule from the FTC is set to go into effect on July 30, 2024. It includes language to protect consumers from yo-yo financing traps by forbidding dealers from misrepresenting transactions as final.

How to avoid
To avoid a yo-yo scam, you should get an auto loan before visiting the dealership. You may receive a better interest rate through a bank, credit union or online lender. Plus, walking in with financing already locked down gives you additional negotiation power.

Negative equity scams

Negative equity, also called being upside-down on your auto loan, is when you owe more on your car than it is worth.

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 after signing 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.”

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. You can choose to roll over negative equity into a new loan. But the dealer needs to clarify how that will affect your loan.

Loan packing

Dealers may pressure you 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 is to get you to spend more.

You are under no obligation to agree to add-ons. If an option interests you, try to negotiate the price for the extra item.

Remember, when it’s added to the loan, you’re paying interest on it. Review your contract carefully before signing.

The new CARS Rule should make this process easier. Dealers will be required to get your “express, informed consent” before any additional charges for products or services are added to your bill. But dealers may try to buck this rule, so stay wary.

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.

What to do if you’re targeted for auto loan fraud

When buying a car, review your loan contract and ask the sales rep to clarify any questions you have.

There are plenty of dealers, both online and in-person, that offer similar vehicles. If the dealer won’t answer your question or pressures you to sign, back out. You have other places to shop. And you can report a complaint to the Consumer Financial Protection Bureau (CFPB).

If you believe you were the victim of a scam, the FTC outlines steps you can take depending on the information the scammer has. You can also report the fraud and determine your next steps from there.

Unfortunately, it may be difficult to get your money back after paying for a loan modification. But you may have some recourse if you were the victim of a predatory dealership. After filing a report with the FTC, contact your state attorney general to notify them of the scam and learn more about your options.

The bottom line

Car loan modification scams target vulnerable buyers who have poor credit or who are late on their payments. 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.

And if you’re shopping for a car, ask clarifying questions. Review every document you are asked to sign. The best defense is avoiding predatory practices and shopping elsewhere.