If you buy a new or used car, and a few days later the dealer tells you there's been a problem with your financing, alarm bells should go off. You might be the victim of a "yo-yo" financing scam — so called because you’re pulled back into the dealership to renegotiate the deal at a higher interest rate and worse loan terms.
Such scams are a twist on what's known as a "spot delivery" in which the customer drives off in a car while the dealer continues shopping for their financing. By understanding yo-yo financing and what to watch out for at the dealership, you can avoid being put on the spot — and falling prey to deceptive practices.
Buyers at risk
Yo-yo financing "is a significant problem with dealerships that cater to lower-income borrowers, and oftentimes for people of color," says Rebecca Borné, senior policy counsel for the Center for Responsible Lending.
Rosemary Shahan, founder and president of Consumers for Auto Reliability and Safety, a nonprofit consumer advocacy organization, calls yo-yo financing scams "epidemic."” Often, she says, dealers target people who are vulnerable or seem uninformed: young or older people, minorities, recent immigrants and even members of the military.
How yo-yo financing scams work
Dealers use spot deliveries to take buyers out of the market for a car before they've finalized the financing. Spot delivery laws vary significantly from state to state, but when the practice is used appropriately, dealers can get buyers a car quickly, even when banks are closed, such as at night or on the weekend.
However, in yo-yo scams, the dealer gives the buyer the impression the car is theirs to keep. Days later, the dealer may use predatory or deceptive behavior to pressure the buyer into returning to renegotiate the deal. In some cases, dealers threaten to repossess the car or report it as stolen. Shahan says she’s even heard of buyers being arrested for auto theft after refusing to bring the car back to the dealer.
Victims of yo-yo scams who renegotiate wind up with an interest rate that is, on average, five percentage points higher than the initial loan, according to CRL. Those who are victimized by this practice often "are those who are least able to shoulder the burden of higher interest rates and don’t have a lot of bargaining power to get a fair deal," says Borné.
But there are steps buyers can take to protect themselves.
"Once you fill out that credit application, they know so much about you"” and can then target victims, says Shahan. So it's important for all shoppers — especially those with poor credit — to be alert to early signs of a possible yo-yo financing scheme.
Borné and other experts say to watch out for these red flags:
You’re asked to sign a sales contract with some fields left blank.
It’s not clear what interest rate you'll be paying.
You’re asked to sign a form that says the deal is "conditional."
Or, the dealer lets you drive away in the car without any contract at all.
Don’t be a yo-yo buyer
However, yo-yo financing is easy to avoid. One surefire defense is to avoid dealer financing. You can get a preapproved car loan from an independent lender before you go to the car lot. Or, if you’re buying a relatively inexpensive used car, save up and pay in cash.
The Consumer Financial Protection Bureau recommends additional preventive measures:
Review the sales contract to ensure you understand the terms of your deal.
Make sure you have copies of all documents signed by you and the dealer and that all the contract blanks are filled in.
Verify that the loan rate is final before you take the vehicle off the dealer's lot.
If you’re a victim
If you’ve just purchased a car and the dealer later tells you there's a problem with the financing, proceed with extreme caution.
First, review all of the documents you received from the dealer. See if you signed a form stating that the sale was conditional. If so, Borné recommends that you simply return the car and "unwind the deal."
However, by this point, many people are emotionally invested in the car and want to keep it. One strategy is to demand the financing denial letter from the lender. If the dealer can’t provide it, it may be testing you and trying to set you up for a yo-yo scam.
If the dealer persists, or threatens you, Shahan says it's time to consult an attorney. Visit the National Association of Consumer Advocates site, which lists attorneys who specialize in auto fraud cases. When handled correctly by an attorney, the situation can be resolved without any harm to your credit, Shahan says.