Consumers with problem credit should know that a vehicle straw purchase is usually illegal and will not help reestablish their credit
New and Used Car Financing
Financing a new or used car is normally a fairly simple process. The buyer submits a credit application to a lender. Once approved, loan documents are signed, the transaction is completed and title and registration documentation is issued by the state in the buyer's name.
The process, however, can quickly get complicated if the primary buyer, due to bad credit, lack of credit or income issues, is unable to obtain financing. That's because lenders require the primary driver to be on the loan application.
The problem can usually be solved by adding a co-signer to the auto loan. The best case scenario for this situation is if the co-signer is a husband or wife. In this case, their incomes can be combined to qualify for a loan.
A second solution is convincing a family member or friend to co-sign the loan. In this instance, both the primary borrower as well as the co-signer must qualify individually for the loan in terms of income, payment to income and debt to income.
But, in this scenario, if the primary borrower's credit is terrible or if their income is too low, the lender will turn down the loan even if the co-signer qualifies.
Vehicle Straw Purchase
A vehicle straw purchase is when someone who qualifies for a car loan purchases a new or used vehicle for someone who, for whatever reason (usually it's due to terrible or no credit), is unable to qualify for a car loan.
A straw purchase is considered fraud, since loan documents contain provisions that the borrower must also be the primary driver (lenders include these rules because if a vehicle has to be repossessed, not having the driver's information on the contract makes finding it more difficult). If the lender does find out, they have the legal right to pursue the borrower.
Many states also consider straw purchases illegal and car dealers can get their licenses revoked if they take part in this type of activity.
Finally, a straw purchase won't help improve the credit profile of the person with credit issues, since their name isn't on the finance contract.
The two easiest solutions to the problem are as follows:
- Pay cash for a vehicle. With no lender involved no one cares who is buying or driving the car.
- Finance a vehicle through a Buy Here Pay Here car lot. Although both the down payment and interest rate will typically be higher, BHPH dealers are usually willing to take on more risk than traditional lenders.
The Bottom Line
Vehicle straw purchases are considered fraudulent and usually occur when a consumer with good credit purchases a new or used car for someone with poor credit who cannot qualify for an auto loan.
However, if you are someone who has been turned down for a car loan from a traditional lender, we want you to know that for more than two decades Auto Credit Express has been matching credit-challenged car buyers to those dealers who can offer them their best opportunities for car loan approvals.
So if you're ready to reestablish your credit, you can begin the process now by filling out our online auto loan application.