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Consumers for Auto Reliability & safety (CARS)

CARS is a national, award winning, non-profit auto safety and consumer advocacy organization working to save lives, prevent injuries, and protect consumers from auto-related fraud and abuse.

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Yo-yo Financing Trap

Predatory auto financing is on the rise. Yo-yo financing is one of the worst problems that plagues car buyers today. Here's how to avoid falling into the yo-yo financing trap.

What is yo-yo financing?

It's a highly sophisticated scam. After you have taken delivery of your new vehicle, the dealer calls to inform you that you did not qualify for the financing you had applied for at the time of sale and you must return and sign a new contract with new financing at a higher rate. Some call it "bait-and-switch financing." It's also called "spot delivery," since it involves letting you take delivery of your new vehicle on the spot, even if the dealer says that the financing has not yet been approved. How does yo-yo financing happen?

After several hours at the dealership, you finally choose a car and agree on the purchase price and any add-ons. You think the negotiations are over and your guard is down.

Then you are introduced to the Finance and Insurance (F&I) manager, who is all smiles and acts friendly. He tells you he'll find you a loan at a terrific rate. The interest rate for the loan seems reasonable. You sign the documents. The dealer hands you the keys to your new auto, and you drive off, thinking you are now the proud owner of a new car.

You show your new car to your family, friends, and co-workers. Everything seems to be going just fine.

Then the dealership calls you and tells you to come back. When you do, they try to get you to pay a larger downpayment and they want to raise the interest rate. They may insist that you get someone else with better credit to co-sign for the loan.

If you balk at signing a new contract, they try to make you feel trapped into agreeing to a worse deal than you had already negotiated. For example, they:

  • Threaten to report the vehicle as stolen, unless you return it immediately leaving you with no way to get home, especially if you go there alone at night and don't have cash for an expensive taxi ride

  • Threaten to repossess the vehicle and destroy your credit

  • Threaten to report you to your base command, if you are in the military

  • Threaten to report you to your employer as a "deadbeat"

  • Claim your credit is worse than you thought (even when it is often better than they claim)

  • Claim they have sold the vehicle you traded in, although it may still be sitting on their lot

  • Claim they tried to find you a loan at the lower rate, but it fell through (later you may find out they never even submitted your loan application to a lender)

    The bottom line is that they act like they have you over a barrel and can change the terms of the original contract, and pressure you into agreeing to a new contract with higher rates.

    Why do dealers engage in yo-yo financing?

    It's all about money. Sometimes dealers get kickbacks from lenders, in exchange for a higher interest rate loan. The higher the interest rate you pay, the more profit the dealer makes. Sometimes the F & I manager gets a commission based on the interest rate you agree to pay.

    How can you avoid being "Yo-yo'ed"?

    One sure way to avoid this scam is to save up for your next car and instead of taking out a loan; pay cash.

    Buy a less expensive used car instead of a new or nearly new vehicle. They are generally better deals anyway, since cars depreciate in value most drastically when they are newer.

    If you really do need a loan, NEVER let the dealer arrange the financing.

    Shop around for a loan from a reputable bank or credit union. Get pre-approved for a loan before you shop for a car.

    Don't be suckered in by signs that say "Bad Credit? No problem!" or "0% financing." Those are classic signs of a potential bait-and switch in the making. The dealer's primary goal is to lure you in. Then after you sign on the dotted line, they reel you back in again.

    What can you do if a dealer tries to yo-yo you?

    If the dealer calls and demands that you return the vehicle:

    If you are called back to the dealership for a "new contract", take a friend with you who drives another vehicle, so you can leave the car you bought under the original contract, and still have a way home.

    Write a note to the dealer asking that they put in writing that you failed to qualify for financing under the original contract. If they refuse to do so, you have either caught them in a lie, or they are trying to avoid clear evidence that the original contract is no longer valid. If they continue to refuse, leave the vehicle, with the keys and you follow up with a letter to the Manager that his dealership refused to put in writing that the original financing did not go through thereby voiding the contract.

    Don't let the dealer pressure you into another contract on worse terms, unless of course you are willing to live with those terms. Refuse to sign a new contract.

    Stay calm. If the dealer tries to intimidate you, return the car, give the dealer the keys, and leave. At that point, you no longer have a contract and are free to buy a car elsewhere.

    Dealers are eager to sell cars, especially now, when the car market has taken a nosedive. Often, if you refuse to sign a new contract and insist on returning the vehicle instead, the dealership will back down and accept the terms you already had negotiated.

    If the dealer tries pressure tactics, such as threatening to report the vehicle as stolen or hurt your credit, contact an attorney who specializes in auto fraud (your local Bar Association can direct you) who can assist you in getting out of the deal, without any repercussions. The attorney may charge only a nominal fee for this service, or walk you through the steps so you can do it yourself. It's better to pay a small amount for legal assistance than to lose thousands in excessive monthly payments, for the next 5-6 years.

    If the dealer refuses to give back your downpayment, after you return the vehicle, contact an attorney specializing in auto fraud or take the dealership to court to recoup your downpayment. You might consider using small claims court to recover up to $7500, without hiring an attorney.

    Yo-Yo Success Stories:

    A young actor on Los Angeles bought a new motorcycle at a major Honda dealership near his home. He left about $300 as a downpayment, and financed the rest. Then the dealer called and told him his loan did not go through. The next transaction had a much higher interest rate that added hundreds onto the price of the motorcycle. Then the dealer called again and wanted even more.

    When the actor balked at that, the dealer threatened to report the vehicle as stolen. The actor kept his cool. He had the motorcycle towed back to the dealership and left it and the keys there. He took photos of the motorcycle being returned to the dealership, as proof he had returned it.

    The dealer refused to give him back his downpayment. They thought that would force him to cave in. Wrong. Instead, he took the dealership to small claims court, and won a sweet victory. The judge ordered the dealership to refund the actor's downpayment, filing fee and court costs. Then the dealership appealed the case to Superior Court. They brought in their attorneys, thinking again the actor would cave in. Wrong again.

    He represented himself in Superior Court, and won again. Finally, the dealership refunded his downpayment. Meanwhile, he had purchased another new, better motorcycle from a different dealership. He told that dealership not to even think about trying to yo-yo him. Wisely, they stuck with the initial contract.

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