A straw purchase is when goods or services are purchased for someone other than the person making the purchase. Not all straw purchases are bad.
Legal Straw Purchases
Parents make straw purchases every day when they purchase clothes for their children, buy groceries for an elderly neighbor who can’t get to the store, or pay a friend’s electric bill so their lights stay on.
Sometimes a straw purchase is not an act of kindness. It can also be an act of fraud.
Illegal Straw Purchases
Purchasing a gun for someone and lying about who will be using the gun is illegal, as is buying alcohol, cigarettes or other tobacco products for someone who is under the legal drinking or smoking age in Arizona.
Car Loan Straw Purchases
It’s common to wonder: Is a straw purchase on a vehicle illegal? Straw purchases come up frequently with auto loans, especially if the person needing the car has poor credit or no credit.
A common straw purchase scenario is the use of a co-borrower. The co-borrower’s credit is used to get approval for the loan. A co-borrower is different from a co-signer in that the co-borrower is a joint owner of the vehicle.
Co-signers don’t hold an ownership interest in the car but are held responsible for making payments if the primary borrower fails to pay. This type of straw purchase is legal.
Borrower Straw Purchase Scams
What is not legal is for a borrower to purchase a car solely in their own name without revealing the identity of the person who will be using the car. In fact, if the car is used for illegal purposes, the original purchaser on the Arizona auto title may be held criminally liable. If you’ve done this, an Arizona auto title service may be able to help you fix it.
Another type of borrower scam is for a purchaser to use someone else’s information on the loan application to qualify for the loan.
Dealer Straw Purchase Scams
Unfortunately, there are car dealers out there who will try to use a straw purchase to scam buyers with poor credit. There are several possible scenarios for this scam. All of them start with the dealer telling the buyer that they can’t possibly qualify for a loan by themselves because of their credit situation. The dealer then tell the buyer to find a co-signer for the loan.
The dealer already knows that the buyer won’t get approved for a car loan, even with a strong co-signer. Despite this, the dealer continues to convince the buyer to get a co-signer by telling them that it will help reestablish good credit.
The dealer tells the buyer that if both parties are on the loan, the interest rate and the payments will be very high. Then the dealer explains that if only the signer with the strong credit history is on the loan, the payments and interest rate will be low.
The deal falls through because the dealer can’t convince the primary buyer to stay off the loan. A few days later, the dealer calls to tell you that you must bring the vehicle back and they will charge you for its use. Sometimes a dealer threatens to keep the car you brought to trade in.
The buyer, now desperate, asks what they can do to keep the car. The dealer says, “If the co-signer wants to buy a car, the co-signer can buy it in their own name.”
This one is underhanded. The dealer sells the car to only the co-signer without the primary buyer or co-signer realizing what’s happening. This is accomplished with a second set of paperwork. The seller rushes the paperwork and things get very confusing. Excuses are made about needing extra paperwork to get the loan approved.
Later, after the purchase is complete, the dealer may destroy the proper paperwork. This intentionally leaves the paperwork with only the co-signer as the buyer. It can take over a month for everything to come to light, and this usually happens when the person who thought they were co-signing gets the first bill and the primary buyer isn’t anywhere on it. It can be very difficult to undo this.
How to Avoid ‘Straw Purchases’ in Auto Buying
Obtain a copy of your credit report and scores before you attempt to get a loan. Bring a copy with you to the dealership so you will know if someone tries to tell you something that doesn’t match what you know is true.
When the dealer tells you that you’ve been approved, ask to see the approval letter. The letter from the lender will have both names of the people responsible for the loan.
Another option is to get pre-approved for a loan. Go to a bank or finance company ahead of time to get pre-approved. This allows you to go to the dealership with your financing already in place. Red Mountain Funding lets you apply online.
Don’t sign more than one contract. The dealer may make an error and ask you to sign another contract. If so, rip up the first contract personally before you sign the second one.
Have the co-signer with you at the dealership. Don’t sign anything unless you are both there.
There should be only one contract, even though there are two people signing. The contract will have two signature lines, one for the primary buyer and one for the co-signer. Make sure the right signature is on the right line.
Take your time! Buying a car is a lengthy process. Do not go to the dealership if you have an appointment coming up, and do not let the dealership rush you. If anyone tries to rush you, be suspicious and don’t hesitate to get up and walk away.
Skip the Hassle
One option is to simply skip the hassle of the dealership. For more than 20 years, Red Mountain Funding has been Arizona’s trusted, family-owned-and-operated auto loan provider. Contact us to find out how we can help you find financing that fits your budget.