Tips, Tricks & Trends

What Is a ‘Straw Purchase’ and Why Is It Illegal?

If you need to buy a car and have troubled or no credit, then you do have options. You can wait to buy a car and save up money to pay for it in cash, you can spend time building your credit, or you can get a co-signer with better credit to co-sign on a loan with you. However, there is one method of buying a car that you need to avoid, and that is the “straw purchase.”

What is a straw purchase?

A “straw purchase” is when a car buyer is unable to qualify for a loan due to having bad or no credit, but then has someone else (a friend or family member), with good credit, purchase the car for them. Unfortunately, this method of buying a car is considered fraud and therefore illegal.

Why is a straw purchase illegal?

A straw purchase is considered illegal because there are statements on the loan documents stating that the primary person on the loan needs to be the primary driver of the car being purchased. If anything were to happen to the car, like if the car needs to be repossessed, then the lender will be unable to track the car down and can then take legal action against the borrower on the loan.

RELATED: Can I Get a Car Loan With No Credit?

Buying New Vehicle
UNITED STATES – AUGUST 01: Anne Murphy, right, works with sales manager Garret Edens to see if her used truck meets requirements for the government’s “cash for clunkers” program at David O’Neal Chrysler Jeep Dodge at Westgate dealership in Raleigh, North Carolina, U.S., on Saturday, Aug. 1, 2009. The government’s Car Allowance Rebate System (CARS) program boosted industrywide deliveries of new vehicles to the highest levels of this year. (Photo by Jim R. Bounds/Bloomberg via Getty Images)

How can you avoid making a straw purchase?

If you find that you need to buy a car but have challenged or no credit, then it is advisable that you find a co-signer first. The difference between having a co-signer and straw purchaser is that the co-signer actually goes in on the auto loan with you and takes partial responsibility as the loan will be reflected on their credit report as well. A straw purchaser, on the other hand, buys the car for you with the intention that you will drive the car and make the payments on their behalf.

Another method of buying a car if you are not in a good credit situation is to go to a “buy here, pay here” dealer and purchase a car with them. These dealerships are typically small, privately-owned dealers that allow you to purchase a car and pay for it via monthly payments all at the same place without doing a credit check. The reason they don’t do a check is that they’re essentially loaning you the car while you pay them monthly installments, however, the interest rates can be astronomical as opposed to a traditional bank loan.

RELATED: Why Car Dealers Don’t Care About Your Online Credit Score

A man looking at buying a Corvette
A person browsing cars thinking | Bob Carey/Los Angeles Times via Getty Images

Avoid a straw purchase at all costs

The bottom line is that a straw purchase is illegal and you should avoid making that mistake at all costs. If you end up applying for an auto loan and don’t get approved, remember to explore the aforementioned options. Also, if you know someone that asks you to purchase a car for them due to not having good enough credit, offer to co-sign with them instead so that you don’t get into trouble. Even with the best intentions, one wrong move could lead to fraud, and that would be the worst car buying experience you could possibly have.