How To Buy A Car With No Credit Or Bad Credit

“The Straw Purchase”

"Straw Purchase" transactions have increased in recent years.  Incidences of this typically increase when interest rates go up, and fewer people qualify for loans as lenders tighten their belts. Even though we touched on this scam earlier under the section on co-signers, it bears repeating because this type of scam can happen before you know it has.

A straw purchase traditionally refers to handgun sales. When one person buys a handgun for a person who is ineligible to own one, it's called a Straw Purchase, carrying stiff penalties. That's how the Columbine High School student shooters got their guns.

With car buying, the dealer tells you that with your horrible credit score, you can't qualify for a car loan so you need to get a co-signer, plus they tell you that it will help build your credit again. The dealer knows your horrific credit score could not possible ever qualify for a loan, even with a co-signer.

So you find a co-signer who is duped by the dealer during the paperwork shuffle, and is tricked into signing as the primary borrower.  Later, you find the dealer did not process a co-sign loan, the entire loan is in your co-signer’s name!

Obviously, this does not help your credit, even though you are paying the monthly payments, because the loan is in someone else’s name, and the car dealer lied to you. Lenders’ policies regarding to what extent straw purchases are considered fraud vary widely but some states like Texas have laws against Straw Purchases on cars.

To avoid a Straw Purchase transaction, (a) both signers should be present at the same time to sign the necessary papers being presented, and (b) both signatures should be on the same contract.  Never sign separate contracts. There should be a separate line item for co-signer.

Straw purchases, long a part of the indirect lending environment, were recently used in an organized fashion in southern California to defraud lenders of 207 vehicles totaling $8.5 million dollars in losses.

A notice to the cosigner is required by the Federal Trade Commission's Trade Regulation Rule on Credit Practices. The cosigner should ask for a copy of that before they sign it.

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