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Car Buying Lending Limbo and Yo-Yo Scams

When a consumer purchases a vehicle to be financed, it is common that the car dealer has not yet obtained a lender to finance the sale. The consumer drives off the lot believing the car loan is approved according to the financial terms shown on the contract. In reality, funding might get rejected.

WHAT LENDERS CONSIDER. Many factors are considered when a lender decides whether or not to fund the loan, including the amount of down payment, credit scores, prior repossessions or bankruptcies, how many optional products are added to the purchase, whether there is a trade-in with negative equity, etc. Lenders typically want to see that the buyer is financially invested in the vehicle reducing the risk of default on the loan. Lenders also want to minimize the loan to value ratio between what is owed on the loan and what the car is worth, so a trade-in with a substantial negative equity rolled into the new car loan would be a big risk factor.

DEALER'S RIGHT TO CANCEL THE SALE. If the dealer can’t find a lender to fund the loan, in California, it is common for a vehicle purchase contract to include a section called “Seller’s Right to Cancel” on the back of the contract. This contract term typically states that it may take a few days for a seller to verify your credit and assign the contract, meaning get your car loan approved and transferred to a lender. If the seller is unable to assign the contract to a financial institution under terms acceptable to the seller, it may cancel the contract and demand return of the vehicle. (Alternatively, the dealer may choose to finance the sale in-house.)

DEALER HAS 10 DAYS TO FINANCE OR CANCEL THE SALE. If the dealer cancels the contract, it must give the buyer written notice within 10 days of the date of the purchase contract, and the buyer must immediately return the vehicle, but the seller must return the buyer’s down payment and any trade-in vehicle. If the buyer refuses to return the vehicle, the contract terms usually state that the seller can charge for its expenses in taking the vehicle, including reasonable attorney’s fees.

YO-YO SCAMS. Unscrupulous dealers may engage in what is commonly called a yo-yo scam by telling a buyer that she is approved for a loan knowing that is highly unlikely or even impossible. The dealer waits a couple of weeks and then calls the buyer demanding more money down or demanding the buyer sign a new contract with less favorable terms, such as a higher down payment, interest rate, or monthly payment. The bottom line is that a consumer is in no way obligated to sign a new contract. Instead, the consumer can cancel the contract, return the car, and demand return of the full down payment and any trade-in vehicle.

(Your contract language may be different than what is discussed here. It is important to review your actual vehicle purchase contract, including the fine print on the back.)

Additional resources provided by the author

FTC Article: "FTC to auto dealers: don’t toy with yo-yo financing" September 29, 2016 by Colleen Tressler

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