What is a Straw Purchase Car?
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A straw purchase is a recipe for getting a good rate on a loan that you aren’t qualified for, but the secret ingredient is crime. To perform a straw purchase, two people must agree to defraud a lender or dealership together by having one person with a good credit score and financial standing secure a loan in order to purchase a car for another person who could not.
The person with poor credit will then either pay the person who set up the loan or just pay the lender directly under the name of the straw purchaser. While this may sound like a good way to get more affordable payments with lower interest on a car, it is illegal.
If you have bad credit, don’t try to rope your friend into one of these arrangements, and if you have good credit, don’t let anyone talk you into committing this crime with them. In this article, we will discuss why some people end up in these situations, on purpose or by accident, and the few exceptions and ways to avoid straw purchases.
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Why Do Straw Purchases Happen?
Straw purchases can either be initiated by the buyer or the seller. Individuals can be denied a loan for a variety of reasons, including low credit score, low income, high debt, criminal history, a combination of those factors, or any reason a lender would not feel confident you can pay the money back on time.
If you are rejected, you have the right to ask the lender why your application for a personal loan was not approved. While there are legal solutions to secure a loan if you are underqualified, some turn to using someone else’s name and financial information to secure financing.
Sometimes, these arrangements are agreed upon by the straw purchaser and the actual purchaser, while other times, the purchaser will pretend to be the other person and use their information to apply for the loan.
Either position is risky since the straw purchaser is the actual owner of the car, so they can take it back whenever they want, and if you straw purchase the car and the driver stops paying the lender, you have to either pay for their car or watch your credit rating plummet. The risk isn’t worth it for anyone involved.
Not all straw purchases are started intentionally by the buyer. There are some instances where a car dealership will trick someone into engaging in the straw purchase. This is an extremely predatory practice to sell cars to people who shouldn’t qualify for financing to buy the car.
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While still uncommon, this is more commonly done when you have a co-signer with you, or they could ask you to get a co-signer when they see you couldn’t get a loan. One trick they might use is telling you that if you co-sign the loan, then your interest rate and monthly car payment will be exorbitantly high.
This is a lie that a scam artist tells when they know you couldn’t secure a loan even with a co-signer. The scammer will then tell you that if you take your name off of the contract and just have the co-signer listed, you can get a good interest rate and low monthly payments.
This might sound sketchy off the bat reading about it, but it might be harder to catch this when you’ve been shell-shocked by the high price they told you about, and they hit you with legalese contract jargon. Another way to trick buyers into straw purchases is to tell you that there is separate paperwork that your co-signer needs to fill out in addition to your paperwork.
Once you have both filled out what they want, your paperwork hits the shredder, and the would-be co-signer’s paperwork is sent through to the lender, where it gets approved. If you ever go to buy or lease a car with a co-signer, do not let the financing office have any paperwork that doesn’t have your name as the primary applicant and the co-signer on the same contract as your co-signer.
Unfortunate as it is, you are much better off not getting approved to buy a car than being tricked or coerced into a straw purchase.
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Exceptions and Ways to Avoid Straw Purchases
We’ll start off by saying, not every car purchase made by one person for another to drive is illegal. If you want to buy a car for your child, you are technically making a straw purchase since the actual owner of the car has no intention of using the vehicle.
But rest assured, you are within your rights to buy a car and give it to your child; you just need to tell your lender that you are buying the car from someone else, so they don’t expect you to be the primary driver. You do enter murkier water if you want your child to pay for their own car but get a good rate thanks to your already established credit, so you sign for the loan. That way, they can pay less.
In that situation, you are defrauding the lender by securing a loan for a car that you will neither drive nor pay back yourself.
If you want your child paying for their own car, you instead want to join them on the loan as a co-signer by agreeing to back up the loan and taking responsibility for the payments if your child is unable to for whatever reason.
This can also be an effective way to build a child’s credit score without exposing them to too much risk, which will help them get better interest rates for their future car loans and mortgages.
Co-Signing a lease isn’t just for family though, anyone with a solid, trusting relationship can co-sign a car loan. If you don’t qualify for a loan, or at least one at an affordable rate due to poor credit, a co-signer might give the lender confidence to lend you the money since they know that if you can’t afford the payments, the co-signer will.
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