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7 Common Financing Scams Car Dealers Use To Get More Money Out Of You - Car Buying 101

By Edited Jul 12, 2015 1 4


Buying A Car?  Watch out for these scams!

Car salesmen are well known for being as slippery as eels.  Though the days of fast talking salesmen may be past us, we still must face the gauntlet of smiling sales people who are trying to maximize their profits in anyway they can, some legal and some illegal.

One of these ways is to play around with your automobile financing options.  All it takes is a switching of a number here, a mix-up of paperwork there, or a sweet talking financial officer to add hundreds or even thousands of dollars to the final price of your car. 

Here are a few scams that car dealerships can use to make more money off of your automobile financing:

1) Extras Are Suddenly Required For Financing

Some car dealerships will try to tack on life insurance,

Car Buying Scams and You
extended warranty, VIN etching, rust-proofing, or one of the many other expensive but not needed addons to your total with the excuse that the bank "requires" it for approval.  This is a complete lie and illegal in many states.  This is just another way for the dealerships to pad their pockets.  If a bank was really worried about your ability to pay off a $30,000 car, they wouldn't want you to tack on even more to the principle in "required" extras. 

Best Way To Avoid It?

If a salesman or financial personnel tell you that you must have any of these "addons" on your contract to get bank approval, ask that this requirement be placed in writing so you may check with your State Attorney.  I bet those "requirements" suddenly disappear.  If they do not relent, don't be afraid to walk away from the deal.  You haven't signed the final documents so you are not financially obligated to anything.

2) Sticking You Upside-Down

You've probably heard the ads on the radio - some fast-talking announcer proclaiming, "We'll pay off any loan, no matter how much you owe!"  Sure, they'll pay it off…but then turn around and add the amount you owe on your old car onto your new loan, putting you "upside down" in your car.  ("Upside down" is a term financial people use when you owe more on something than it is worth.)

Let's say that you want to buy Car B and use your existing car, Car A, as a trade-in.  The dealership tells you that they will only give you $4000 for Car A but you still owe $8000 on it.  If you do the simple math, you'll quickly realize that you will be $4000 in the hole to your old bank.  Of course, this debt doesn't just disappear – it has to be paid off some how.  So, your new friend, the salesman, will quietly tack it onto the backend of your new $20,000 car loan.  This means that you now owe $24,000 and all interest applicable.  Congratulation – you are not officially "upside down" in your car loan.

This may seem logical and legally okay to someone who is desperate to get rid of a car.  The problem comes when the dealership doesn't disclose what you still owe or how much is being carried over to your new loan. 

Best Way To Avoid It?

Check online websites to get a ballpark trade-in value for your current car.  Compare this to what you currently owe.  If you owe more than what it's worth, it's probably best for you to wait until you've paid down your loan more and try again.  

If you really, really want to get into a new car, it would be better for you financially to sell your current car to a private buyer using your local paper or CraigsList.  You'll be guaranteed to get more than way but it is more of a hassle than trading it in with a dealer.

3) Conveniently "Forget" To Pay Off Your Trade-In

Let's say that you do get a great deal on your trade-in.  You sign the paperwork, exchange keys, and off you go with your new car.  It isn't until two months later when the collection agencies start to call that you realize that someone at the car dealership forgot to pay off your old car. 

Car Buying and You - Protect Yourself Against These Scams
You call the dealership and the representative for the finance department asks you, "What trade-in?"  When you review your paperwork, you realized that it doesn't state that you traded in your vehicle nor is the trade-in reflected in the price stated on the financial paperwork.  Not only did you give the dealership a free car but you're also stuck with paying two car payments AND your credit history was dinged for the late payments!

Best Way To Avoid It?

The best way to avoid a mix up with your trade-in is to not have a trade-in.  Sell it to a private owner or another car dealership.  The next best way is to wait until your car is completely paid off before you trade it in for something new. 

Of course, those choices aren't always available.  If you must trade in your car to the dealership and you owe something on it, you should be diligent about the paperwork.  Make sure the dealer puts the trade-in details in writing including the payoff amount, when they will pay the existing loan off by, and how much of the trade-in value is being put towards the new loan.  This way, he and/or the company is liable and you have proof to back it up.  If the dealer refuses to put any of this in writing, run, run, RUN!

4) Lies, Lies, Lies!

The finance department runs your credit and comes back with bad news: your credit score is too low to qualify for the super-duper low interest rate.  Do not believe them!  This little trick is used all the time on people with good and bad credit. 

Best Way To Avoid It?

Know your credit history and score.  Get a free credit report from the three main credit agencies, Equifax, Experian, and TransUnion, and review them carefully before you even think about looking at cars.  Dispute any discrepancies right away so that you can get the best financing deal possible.

When you do go car shopping, bring a copy of your credit report and score with you so if they pull this stunt, you can prove them wrong.  Even if they do correct their "mistake", you should be wary about doing business with them.  If they're willing to pull a stunt like that, you can be sure there will be other tricks. 

5) Co-Signer Switcheroo (aka – Straw Purchasing)

If you really do have bad credit, the finance department might tell you the only way to get financing is with a co-signer –a family member or friend who will be financially responsible if you stop making payments. 

This usually isn't a problem if you're dealing with a

Car Buying Scams
reputable bank or dealership.  The problems begin when not-so-truthful sales or financial people decide to play a little paperwork switcheroo on you.  It's easy to do – mom rarely deals with car purchasing paperwork so she wouldn't know the difference between signing as the primary purchaser or the co-signer. 

You and mom end up walking out of the dealership with a new car…and a car loan in mom's name and on her credit report!  This is bad for mom – she's locks out a portion of her credit potential for four to six years – and bad for you – you loose the credit-building potential of paying off the car month after month. 

Best Way To Avoid It?

Your best bet to ensure that your car ends up in your name is to have all signers in the same room at the same time.   That way, everyone involves has a chance to talk over the deal and review each and every document carefully.  Everywhere you sign on the document, your co-signer should have to sign too. 

6) Spot Delivery Scam –

You sign the paperwork and take the car home only to have the dealership call you three days to two weeks later to tell you that your financing fell through.  They want you to come back in and resign paperwork - paperwork that lays out completely different financing terms, interest rates, and requires more money down.  They're hoping that you are now emotionally attached to the car and will go ahead with the new terms.

Best Way To Avoid It?

Get your own financing either from an outside bank or through an online financing company.  There are plenty around that will be glad to help you with minimal hassle.  Best of all, you won't have to put up with any of these scams to start with! 

If you do have to finance through the car dealer, it's best to leave a deposit and do not take delivery of the car until you are sure the financing has come through.  This could take a day or up to a week but the delay will be well worth the financial reassurance. 

Also, remember this - once you've signed a contract, the deal is done!  As long as you signed actual finance documents that show your interest rate, deposit, payments, and other financial items, you are safe.  This document is a binding contract which gives you specific legal rights. 

7) Calling You Back For A Lower APR / Payment

This is similar to the Spot Delivery Scam above - the car salesman calls with good news: you've been approved for a better loan!  You're all excites with the idea of saving money so you rush down to the dealership to lock in that lower monthly payment.

Do not do it!  This is a scam!  To get that lower monthly payment, the financial department had to change something about your loan – usually the length (e.g. 60 to 72 months).  Of course, this type of loan will lower your payments since it spreads it out across more months, but these longer loans always have higher interest rates attached to them.  So, instead of having that great 3% interest rate, your new loan terms might be at 12 or even 17%. 

Protect Yourself Against Car Buying Scams
Best Way To Avoid It?

The easiest way to deal with this is to tell the salesman, "No thanks."  You have a signed legal contract – there's nothing they can do to you.  If the call of a bargain is too much for you to resist, ask the salesman to fax the new documentation for you to review at your leisure.  Look over the paperwork and compare it to your existing contract.  Is it really better?  Probably not.




Jan 17, 2012 12:17pm
This was a great article. I'm sure people looking to buy a new or used car would find the info very useful.
Jan 19, 2012 8:52am
wow, I've never come across any of these scams but I didn't think these even existed, good informative article!
Jan 25, 2012 7:26am
Thanks for the heads up!
Feb 8, 2012 2:14pm
Good information, I visited a site years ago and even today they provide lot of good info about auto CarBuyingTips DOT com No I do not get any money for this folks. ! :))
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