Have you ever jumped the gun at a stoplight -- rolling into the intersection before the red light turns green? You might get away with it. Then again, you also risk getting a ticket.
Something similar can happen to car shoppers, too. Only the risk isn't getting caught in a moving violation -- it's getting entangled in a money violation.
It's called "yo-yo financing," and it's what happens to car buyers (particularly ones with so-so credit histories) who take possession of an automobile before their financing arrangements are complete. If their financing falls through, dealers can pressure the buyer into a revised deal with extra costs or fees -- or move to repossess the car.
The consequences of this dubious dealer practice are no fun: Either you pay more to keep the new car you thought you'd already bought -- or you lose it. It's an embarrassing, and potentially expensive, problem.
How Dealers Catch You in the Trap
The "yo-yo" is a byproduct of a dealer practice called spot delivery, in which a shopper is sent home in a new car on the same day without having to wait for formal financing approval.
Philip Reed, of industry-watcher Edmunds.com, recently noted that dealers like spot deliveries because they quickly turn shoppers into buyers. It's an effective sales tactic, and often a harmless one.
But, Reed says, consumer protection advocates have long tried to regulate the practice because it leaves buyers, particularly those with less-than-perfect credit, vulnerable to abuses.
What kinds of abuses? Typically, something like this happens: You're at a dealer and you decide to buy a car. You sign some paperwork and maybe leave a down payment, and then drive the car home the same day. You think you're done: Happy new car!
But then, a few days later, the dealer calls with sad news: Your financing application was turned down. If you want to keep the car, you'll need to arrange other financing at a higher rate. You might even need to increase your down payment. If you don't, the dealer might tell you they'll repossess the car -- or maybe even report it stolen.
State laws vary: In some states, you can simply give the car back and get a refund. But in others, you might be liable for the complete balance due on the sale -- which leaves you open to the yo-yo problem.
Dealers say that this situation is a byproduct of the fact that many cars are sold at night and on weekends, when financing offices are closed, and not usually a scam. But dealers see an awful lot of financing applications. They should know before you leave the dealership whether yours is likely to be approved.
Simple Steps to Keep from Getting Snared
It's not hard to protect yourself from a yo-yo financing mess -- if you know what to do in advance. Reed's Edmunds.com colleague Carroll Lachnit says that the keys to staying clear of the yo-yo trap are simple:
- Get financing before you shop. With pre-approved financing, you know what you'll be paying every month, and what the fees will be. It takes the whole financing question right out of the dealer's hands. This is especially important if your credit report has a few dings -- if you're in "subprime" financing territory, you're particularly vulnerable to the "yo-yo" problem. Your bank or credit union will be happy to help you arrange a car loan, so make this your first stop. Even if the dealer offers you better terms later on, you'll still have a financing plan to fall back on.
- Always read the contract. "Car buyers should always get every element of their deal in writing," Lachnit says. Then, read carefully: Buyers should be especially wary, she notes, of any conditions in the contract that might allow the dealer to rewrite the deal or add extra charges after the sale.
Either way, the easy way out is to arrange your own financing before you shop. That way, you know what you can afford, and you know your loan options in advance. Ultimately, this will keep you free and clear of the yo-yo financing trap.