Nominee purchase, also known as a “straw purchase,” is described as a purchase of goods or services buy one party with the intention to pass them to someone else, (straw buyer) that is incapable or unwilling to make the purchase for themselves. The goods or service are transferred to the second party for the specific purpose of acquiring those goods or services for the second party.
In general, people make this sort of purchase every day, helping out a friend or needy person with groceries or doctor bills for example.
However, straw purchases become illegal when the party receiving the goods or services is doing so to obtain the property or services illegally (stated in the loan contract) or in the commission of criminal activity or under intentional illegal, fraudulent pretenses.
An example of this would be purchasing cigarettes or alcohol for a minor, or obtaining firearms for someone else while posing as the intended owner.
The original term (straw purchase) comes from illegal purchases of firearms for people that can’t get firearms legally for themselves.
However, in some jurisdictions, a straw purchase is sometimes seen as legal even though the end receiver does not have the legal ability to buy the goods themselves.
Straw Purchase Legal Use and Illegal Uses
A straw purchase car loan for someone else can be legal in some circumstances if the end possessor has bad credit and can’t qualify for a car loan themselves. This straw purchase auto loan is most commonly done with a co-borrower.
A co-borrower partners with you to apply for your loan, using their credit to gain approval. A co-borrower has different responsibilities than a co-signer and acts as a second car owner.
However, many lenders expressly prohibit other types of straw purchase car loan borrowing to receive funds for another individual for a car or mortgage loan.
Any straw purchase car loan, where either of the parties involved provides false information with the purpose of defrauding the lender is illegal, and the borrower can be held responsible for their criminal activity. This includes representing yourself as the car buyer knowing you will not be the vehicle driver and end owner.
Dealer Straw Purchase Scams
Car dealers will sometimes use straw purchases to scam you if you have poor credit. The straw purchase dealer scams look like this.
- You look over the cars on the dealer’s lot and tell the salesperson you have poor credit and want to stick to a particular price range, so you will qualify for a small car loan.
- The seller intentionally upsells you a higher priced model playing on your excitement of possibly owning more car than you can afford.
- The dealer tells you that they are sure they can get you the monthly payments you want.
- The sales person sends your loan request to the finance manager who adds other bogus dealer charges to your loan to fatten the purchase amount that is a lot higher than you originally wanted to spend.
- Then you are told that you will not qualify for the car loan because you do not have a high enough credit score for that line of credit.
- The finance agent explains that if you get a friend or family member with good credit to co-sign the loan then they can get you financed, and you can drive the car home today.
This is a well-rehearsed scam the dealer uses to sell you a higher priced car than you wanted to buy. By using a good credit score from someone else, the dealer can sell you a higher priced loan package and add-on fees you should not have to pay for.
It is always recommended not to be a co-signer on a loan for someone else unless you are perfectly OK with paying off the loan yourself. In many cases that is exactly what happens or your credit record could be tarnished with missed or late payments that are not your fault. You could even lose any collateral you may have put up for the loan.
Many live in boyfriend and girlfriends experience painful breakups, leaving auto loans that are not settled and usually result in acquiring bad credit that goes on for years.
Straw Purchase Co-Signer Scam
Another bad side to co-signing for a car loan is dishonest car dealers who purposefully explain to the co-signer, the paperwork they will have to fill out. Then weeks later, the co-signer finds out that the car loan was filled out in their name instead of the person they were co-signing for.
Once this happens, the remedy is not an easy fix.
Borrower Straw Purchase to Avoid
Another type of straw purchase scam is when a car buyer who cannot qualify for a car loan finds someone willing to apply for the car loan for them by using their information on the contract loan application.
This is considered fraud because the borrower is misrepresenting their self as the primary owner and driver of the vehicle. This is most common with young, first-time car buyers that haven’t established any credit history of their own.
How to Avoid Straw Purchase Scams