Imagine you have saved for months, even years, for the car of your dreams. You arrive at the dealership, negotiate your terms, and drive off the lot feeling on top of the world in your new set of wheels. But days later you get a phone call and are told that the financing fell through and you need to come back to discuss this. You are in disbelief, but what can you do? This scam is called yo-yo financing, and it ropes many Americans into bad financing deals every year.
Let’s talk about yo-yo financing scams and how you can protect yourself from fraud.
What is yo-yo financing?
Yo-yo financing is when you finance a car through a dealership and the dealer pulls you back (like a yo-yo) and changes the terms of the deal after you have already left with your new car.
In reality, dealerships are misusing what is referred to as spot delivery. Spot delivery allows dealers to sell you a car and even send you home with it when banks are closed, like on weekends, nights, and holidays. They can approve you for loan terms conditionally, while final approval will be made later during normal business hours. While this law is intended to help people who need to do business in off hours, when it is misused it allows dealers to prey on vulnerable buyers.
How does yo-yo financing work?
The dealer will sell you the car with their usual tactics. You’ll test drive, you’ll talk, and you’ll get down to business talking about money. The dealer will tell you that you are approved for a certain loan deal and agree about the specifics, including the down payment you will make, the interest rate, and the repayment period. But in reality this is only a tentative deal, and the fine print in your sales agreement backs this up. The dealer has presented this sale as a done deal, when in fact they knew that there was no way you would qualify for such a loan.
But you don’t know any of that; all you know is that you have a new car and a new loan, and you drive home thinking all is well and good. A few days or even weeks later you get a call from the dealer who tells you that the financing fell through. Maybe you need to make a larger down payment, or maybe you need to come in and resign for a higher interest rate. When this happens, you may think that you can just refuse. After all, you signed the paperwork right? This tactic will not work however, and dealerships can (and will) repossess your car. In some instances dealers have even called to report the car stolen and had the drivers arrested for theft.
To avoid this, you go back to the dealership and try to talk to them. Dealers will try to talk you into any of the following:
- Putting more money down
- Agreeing to a higher interest rate
- Lengthening your repayment plan
- Putting you in a different car
What if you traded your old car in and they already sold it? Legally they are only required to give you the cash value of that sale, which can be devastating.
When people fall victim to this scam they have already taken the car home to show their friends and family. They have already fallen in love with their car and can’t wrap their head around returning it. So most people simply give in and agree to the unfavorable terms.
How common is yo-yo financing?
Yo-yo financing is considered to be a widespread problem by the Federal Trade Commission. In 2022 there were 900 cases that were filed where consumers felt they were victims, but it is believed to be a much much larger problem than that. Unfortunately there is no explicit law that bans this practice. That is because spot delivery or spot financing is legal, and this scam is associated with an abuse of that practice.
A handful of states are trying to address this with certain restrictions to spot deliveries. Maryland for example requires that a dealer writes a detailed disclosure before releasing the car to you, and then they have just four days to notify whether or not your financing terms have been rejected. If you have been denied they must return all payments that you have made, including your trade in vehicle, down payment, taxes, and fees.
How can I prevent becoming a victim of yo-yo financing?
There are a few ways that you can protect yourself from this scam. Knowing that this scam is out there is a great first step, but there are other precautions you can take as well.
Get pre approved.
Getting preapproved is incredibly important when it comes to buying a car. You should not depend on dealer financing when looking to get a new car. Dealers typically charge more than a bank or credit union would charge. It’s also easy to get swept away by a dealer's sales pitch and not fully think through the financing terms you are agreeing to. But if you get preapproved you can shop with confidence knowing that you can afford the car you want. Pre Approval will also alert you if a deal is too good to be true. If you know that you were pre approved for a 6.5% loan over 48 months and the dealer tells you that you have been approved for a 5% loan over 36 months, it should alert you that something is off.
Read the fine print.
Everything comes with fine print these days and it’s easy to gloss over language, especially when it seems like it is a standard contract. But the fine print will reveal a lot to you. If you see terms such as “conditional” or you see that some areas on the contract are left blank, question this. If the dealer lets you drive the car away without signing anything, run the other way.
Bring along some support.
It’s a good idea to bring along a friend or loved one when looking to buy a car. They can help keep you grounded and be another set of eyes to watch out for any warning signs.
Don’t sign until you are ready.
Salesmen are trained to get you to sign a contract on the spot. They want to make a sale as soon as possible so that you have less time to change your mind. But keep in mind that there is no rush and you are under no obligation to make a decision on the spot. Walking away and thinking before you sign may save you from a predatory financing deal.
Ask to see proof of approval.
You are allowed to ask for written verification that your loan terms are approved (in fact you should ask for this confirmation). They may tell you it is confidential but that is not true.
What should I do if I was the victim of a yo-yo scam?
There are a lot of red flags that will jump out if you are involved in a yo-yo financing scam. After you leave with your car you will get a phone call from the dealership with one of the following lines:
- You need to come in to make a larger down payment.
- Your interest rate will be increasing.
- We still need your signature on some paperwork.
- You are not approved and must return to discuss.
- Your financing fell through unfortunately.
- You need to come back with a cosigner.
- We have a better deal that you qualify for.
All of these are red flags, but it may be too late to do anything at that point. They are legally allowed to take the car back if the fine print specifies that they can. And unfortunately it is very rare for a customer to win a lawsuit or get to keep the car under the same terms.
If you feel like you are a victim, read all of your paperwork very carefully. If you see that the sale was conditional, try to simply return the car and get out of the situation. You may be invested in trying to keep the car, in which case you can ask to see a copy of the denial letter. If they say they cannot provide it, this is a major red flag that you may have been scammed this whole time. Consider consulting the National Association of Consumer Advocates website to contact an attorney that specializes in fraud. It’s important to file a complaint at the very least so that measures to make this practice illegal can move forward.
That’s everything you need to know about yo-yo financing.
If you feel like you have been a victim of this scam it’s important to file a complaint. You may not be able to get out of the deal, but you can help other people from becoming a victim. If you are in a bad financing relationship it’s a good idea to contact Auto Approve to discuss car loan refinancing. They can help secure a better loan rate and get you more favorable terms.