8 Car Loan Scams and Red Flags to Look Out For

1. Yo-Yo Financing Scams

This scam can happen with dealers that offer financing directly rather than arranging a loan with a traditional lender. It may occur when you leave the dealership with the car before your financing is fully approved.

Later, the dealer tells you the financing fell through and tries to get you to agree to a more expensive loan. If you don't, you'll have to return the vehicle.

How to avoid it: Never drive off the lot until your loan is finalized in writing. Make sure the financing terms are locked in and signed by both parties. Avoid dealerships that don't clearly explain whether the loan is final or still pending.

2. Bait-and-Switch Financing Scams

In a bait-and-switch scam, the dealer advertises a low interest rate or monthly payment but switches the terms once you're at the dealership, claiming you don't qualify for the advertised deal.

They may then try to steer you toward a more expensive vehicle or loan.

How to avoid it: Get preapproved with a bank or credit union so you know what terms you qualify for before you even step foot on the lot. Be skeptical of deals that sound too good to be true, and always read the fine print before signing anything.

3. Buy Here, Pay Here Scams

Buy here, pay here dealerships offer financing directly, usually targeting people with poor credit. However, these loans often come with extremely high interest rates and limited consumer protections. What's more, they're unlikely to report your on-time payments to the credit bureaus.

How to avoid it: Shop around for financing from traditional lenders first. If a buy here, pay here lot is your only option, ask for a detailed breakdown of the loan terms, including the annual percentage rate (APR) and total cost. Avoid dealers who won't give clear answers or discourage questions.

Learn more: The Best Way to Finance a Car

4. Negative Equity Scams

If you're trading in a vehicle but you owe more than it's worth, some dealers may claim they'll pay off your negative equity. However, they just roll the balance into your new loan, sometimes without telling you.

How to avoid it: Know the payoff amount on your current loan and your car's value before trading it in. Ask whether any negative equity is being added to the new loan, and make sure it's clearly spelled out in your contract.

5. Loan Packing

Also called payment packing, this scam occurs when lenders add unnecessary extras, such as extended warranties, service contracts or gap insurance, into your loan without explaining or itemizing them.

How to avoid it: Ask for a full breakdown of every item included in your loan. Decline any add-ons you don't need or want. Take your time to review the contract and don't let anyone rush you.

Learn more: Lender Red Flags to Look Out For

6. Unsolicited Offers

Scammers may reach out with emails, phone calls or text messages offering preapproved loans or special financing. These may lead to fake websites or ask for personal information to steal your identity.

In some cases, they may even offer a live check you can use to purchase a vehicle. However, the terms are often prohibitively expensive.

How to avoid it: Ignore unsolicited offers, especially if they pressure you to act fast or provide sensitive information. Always verify a lender's legitimacy through official channels before engaging.

Learn more: What's the Difference Between Phishing, Smishing and Vishing?

7. Pressure Tactics

High-pressure salespeople might push you to sign a loan before you've had time to review it. They may tell you the deal is only good for a limited time or claim someone else is interested in the same car.

How to avoid it: Take your time and don't let anyone rush you. If you feel pressured, walk away. A reputable dealer will respect your need to read and understand the terms.

Learn more: How to Negotiate a Car Loan

8. Confusing Terms

Some lenders use complex jargon or bury important loan details in the fine print, making it hard to understand what you're agreeing to. This can lead to surprises like prepayment penalties or variable interest rates.

How to avoid it: Ask for a simple, plain-language explanation of your loan terms. Review the APR, loan length, monthly payment and total repayment amount. Don't sign until you fully understand the terms.

Stay Informed to Protect Your Wallet

Car loan scams can be difficult to spot, but staying informed is the best defense. Always compare loan offers, read the fine print and don't hesitate to walk away from a bad deal.

Before applying for a loan, check your credit score and credit report to know where you stand. Experian's free credit monitoring tool can help you track changes, spot potential fraud and strengthen your financial profile, so you can shop for your next car loan with confidence.