Buying a new car is not something I would consider fun. But taking delivery of your new ride – after having researched models and made pro/con lists and negotiated the best deal – will definitely put a smile on your face. Unless you receive a call a week later that something happened with the financing and they need you to come back in to sign another contract. How can this happen?
Spot delivery
Ever wondered how a dealership can sell you a car when banks are closed and allow you to take it home the same day? Spot delivery allows you to take the car home while the dealer secures financing. You sign a contract that sets your terms (the number of payments, interest rate, etc.); the dealer shops this with their lending partners, confident that they will be able to arrange a loan. Normally this works seamlessly.
The call no one wants
You’ve moved all your personal items over to the new car, driven around to show off to your friends, and even discovered the commute to work is so much more enjoyable now. Then you receive a call from the dealership informing you that they can’t find a lender that will fund the loan at the terms you agreed to. You have two options:
You can reopen negotiations for the car, but realize that if they can’t get the loan approved the terms will almost certainly be worse than your original deal. Imagine signing up for a 6.9% loan and discovering the best deal they can now provide is at 10%.
You can return the car. However, if you traded in your old car, you may discover that the dealership has already sold it to an auction house or wholesaler, meaning you won’t even have your old ride available. Plus, if the contract stipulated that your previous car loan would be rolled into the new car loan, that’s no longer the case – you’re on the hook for paying off the car (the one you may no longer have).
Happening more often
Given the number of news stories devoted to yo-yo car scams, this is happening more and more. Most honest dealerships would cite the reason as a combination of people with increasing debt and a market of higher-priced cars. Like with home purchases before the crash in 2008, dealerships may be pushing underwriting standards to get people in cars.
An honest mistake or a scam?
There’s a fine line between honest attempts to sell someone a car and blatantly telling someone they qualify for a loan that they don’t. Some dealerships have been accused of having customers sign loan paperwork that they know will not be accepted by their lending agents. Finance managers also fully know that their customers will quickly grow to love their car once they get it home, leading them to renegotiate rather than turn the car in.
What can you do?
As with every scam, simply being aware of its existence will make you more likely to recognize what’s happening and take actions to keep from being conned. Knowing that you have the right to return the car is also huge – that’s the last thing the dealer wants, so instead of being at a weaker position in negotiations you could use this to your advantage.
Know your state laws. In my state, there’s a policy by the Office of Consumer Protection which states that if the sale or lease is awaiting final approval, the dealer must retain title and possession of any trade-in until the financing is actually approved. If not approved, the customer can return the car and receive his trade-in and down payment.
Read the contract. Take a minute to read through the contract. No salesperson will like you doing it, but if you’re in the finance office they’ve invested a lot of time in you. They aren’t going to say no. Even if you don’t read through every word, pay specific attention to any section on financing, especially if it gives the dealer a time period to rescind its offer (look for language like “Sellers right to cancel”). Should you have any questions, ask the finance manager.
Go in with your own financing. I’ve used my own financing for every car we’ve purchased. It’s not that I didn’t trust the dealership, it’s that I never bought a car when dealers were advertising 0.9% finance specials so I needed to find the lowest deal on my own. This was usually with a local credit union.
Don’t ignore the dealer
While this whole situation stinks, don’t ignore the calls you receive from the dealer. In stories I’ve read, dealerships sent repossession companies to retrieve their cars. In one instance, they actually reported it stolen.
If you receive that call from your dealer, try to see through the disappointment and anger to find out what your options are while you have the person on the phone. Ask for the new interest rate and if they will require more of a down payment. Set a time to go into the dealership, but before you do fully consider your options. Read through every line of the contract you signed. If they still have your trade-in, do you just want to wash your hands of the whole deal? Or if you want the car, can you apply for a loan at a credit union and bypass the dealer’s financing? You still have some wiggle room even if you are a victim of the yo-yo car purchase.
Photo by Erik McLean