How to spot a car loan modification scam

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

Watch for signs similar to mortgage scams

“The scams are similar to mortgage modification scams, with scammers telling customers they could prevent repossession of their car and could reduce their payments,” says Gregory Ashe, senior counsel for the Office of FTC Consumer Protection. (Federal Trade Commission).

Ashe says scammers typically tell consumers to stop paying for their car and not talk to their lender. The scammers say they will contact the auto finance lender, but they do nothing or only make initial contact. Repossession can occur after only two or three months of non-payment.

To avoid falling victim to an auto loan modification scam, the FTC recommends contact your lender directly as soon as you realize you will have trouble making the payment for your car. The longer you wait to call, the fewer options you will have available.

“Auto lenders typically don’t lower interest rates or reduce a car’s principal balance,” Ashe says. “If there is relief, it’s usually to extend the term of the loan to lower your monthly payments or to defer missing payments until the end of the loan. You’ll pay more over the term of the loan, so there’s no real savings – but at least you have a chance of paying your car payments.

While the FTC has focused its attention on loan modification scams, some auto loan scams also target consumers early in the car buying process.

Yo-yo financing scams

An initial car loan scam is a yo-yo financing scam. This occurs when a car dealer tricks a buyer into thinking financing is final, accepts a trade-in or down payment, and allows the buyer to leave the dealership with a new car.

A few days or even weeks later, the dealership will call the buyer and tell them that the financing has failed and the buyer needs to come back and sign a new contract, usually with less favorable terms. These scams often target consumers with fewer financing options because they have bad credit or no credit profile.

“If financing is not successful, the dealer may ask you to obtain other financing at a higher interest rate or ask you to return the car,” says Christopher Kukla, Markets and Policy Manager at Consumer Financial Protection Bureau. “The dealer may charge you for the wear and tear on the car or even a daily lease fee for the time you’ve had the car if you choose not to refinance.”

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

To avoid a yo-yo scam, buyers can come to the dealership with guaranteed financing up front. You’ll probably be able to get a better interest rate from a bank or credit union where you already have an account. Plus, entering with funding already locked in gives you additional bargaining power.

Kukla says consumers should also realize that they have the right to take financing documents home to read before signing. “Plus, you can tell the dealership that you won’t be taking the car home until the financing is finalized,” Kukla says.

Negative Action Scams

The FTC took administrative action against four dealerships for violating the Truth in Lending Act because these dealerships failed to make it clear to consumers that when they offered to “pay” the balance owed on an exchange, they were actually taking the negative principal and applying it to the borrower’s new car loan balance. Some customers have complained that they don’t know until they sign their new auto finance documents.

“Consumers should read the documents carefully before signing them, because it doesn’t matter what is said. It doesn’t matter what is written,” says Ashe. “If you don’t understand something, then don’t sign it.”

Ready to pack

Kukla says consumers often feel rush to buy additional productssuch as extended warranty, gap insurance, rustproofing, tire rotation and service contracts when they buy a car.

“Some of these are beneficial, some are not,” says Kukla. “The dealership will offer to include these items in your loan, but they may be cheaper elsewhere.”

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

“We got used to buying a car like we buy everything else, buying it and bringing 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 bad credit or are behind on their payments. But if it sounds too good to be true, then it probably is. If you’re having trouble repaying 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 are making an honest effort to keep making payments.

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