You're buying a car and — your credit being what it is — you breathe a sigh of relief as you sign the sales contract. But several days later, the dealer calls to say that the financing fell through and you have to sign a new agreement at a higher interest rate. Naturally, you're confused and don't know how to respond.
You could be the victim of what's called "yo-yo financing." In this situation, a dealer permits a buyer — typically someone whose credit is shaky — to take possession of a car before the financing is actually complete. A short time later, however, the buyer is pulled back to the dealership when the financing falters. He's faced with having to pay higher interest rates and fees. Sometimes the dealer demands a larger down payment, too.
The yo-yo ploy is a byproduct of the "spot delivery" process, in which cars are sold "on the spot" before the financing is complete. Depending on where you live, there might be laws to protect consumers from spot delivery abuses — or not.
Uses and Abuses of "Spotting"
Dealers say spot deliveries are essential to their business and are a clear benefit to a customer who is eager to drive off in a car. Spot deliveries, dealers say, turn shoppers into buyers. But consumer advocates say spot deliveries leave buyers with so-so credit vulnerable to dealership abuses. Consumer protection agencies have long tried to enact laws against the practice of spot deliveries.
The issue arises because most banks can't approve loan applications at night or on the weekends, which is when many cars are sold. With a spot delivery, a dealer begins the loan application and lets the customer drive away in the car. When the banks reopen, lenders review the applications and approve or decline them.
In "Confessions of an Auto Finance Manager," auto finance manager Nick James says that spot deliveries led to some of his worst experiences in a dealership. When he told one young buyer that the financing had fallen through and that he had to return a pickup truck he had just purchased, the man lunged across the desk and tried to strangle the sales manager.
The buyer had already shown the truck to friends and family and had developed an attachment to it, James says in the article. "Now the dealership was taking it away from them. It was an unintentional form of public humiliation."
In a Federal Trade Commission (FTC) roundtable discussion with dealer representatives and consumer advocates in 2011, attorney Michael Beniot said, "Yo-yo financing is a very, very bad practice, and I don't think there's one dealer in the country who would stand up to support it." However, he added that it is a "small subset" of spot deliveries as a whole.
But Chris Kukla, senior counsel for government affairs for the Center for Responsible Lending disagrees. He says that one Raleigh, North Carolina, attorney gets so many requests from consumers for help in untangling such cases that he only takes one in four of them. Because of laws favoring dealers, "every single transaction is a potential yo-yo," Kukla says.
Know Your Rights
Laws governing spot deliveries vary from state to state, Kukla says. In many cases, the standard sales contract contains language allowing the dealer to request that the car be returned within a certain time period if financing falls through.
Under Illinois law, for instance, if the dealership can't find financing at the rate in the contract, it is required to return to the purchaser any down payment or trade-in under the contract, according to the state attorney general's Web site.
Meanwhile, in California, most sales contracts are actually called "conditional sales contracts" and there are several statements in the document noting that the seller is attempting to get the buyer financed "at a speculated rate," says California Department of Motor Vehicles spokesman Armando Botello. However, the contract also says that if the loan is not approved, the buyer is responsible to pay the complete balance due.
Regardless of the letter of the law, Kukla says dealerships can pressure unwary consumers to accept new, more expensive terms using a variety of tactics. Some dealers have threatened to repossess cars, while others even say they will report the vehicle stolen. When a would-be buyer asks to simply return the car, some dealers have demanded high rental fees or charged for excessive wear and tear on the brief period of usage.
The lenient law is a "get out of jail free card for dealers," Kukla says. Furthermore, the dealer should know if he can get financing for a buyer or not since "he does more deals in a week than most consumers do in a lifetime."
Avoid Being Put on the Spot
Botello recommends that subprime shoppers — those with a credit rating under 680 — get preapproved financing to avoid spot-delivery problems. Those consumers wondering if their dealership financing is final should ask to see a copy of the confirmation from the finance company. Also, be wary of signing any additional paperwork or "conditional" boxes in the contract. These might allow the dealer to rewrite the contract under different terms.
But what if the car is already in your driveway and the dealer demands that you return it? A former dealer, who asked not to be named, advises that buyers ask for a copy of the letter denying financing at the agreed-upon terms. This simple request might bring an end to dealer demands. If it doesn't, you can return to the dealership to discuss the situation — but not in the car you bought. The dealer might try to seize the vehicle as leverage for his demands. If the dealership can prove the loan was denied, of course, you have to bring the car back and figure out your next step.
The Final Word
Spot-delivery abuses show how vulnerable subprime buyers can be to dealership scams. But another truth is that a new car might be out of reach until a shopper's credit score improves. There are alternatives, however, including buying an inexpensive older car for cash — and saving up for something better.