Car Buyers: Beware the Yo-Yo Financing Car Dealership Scam

By FindLaw Staff on April 20, 2012 | Last updated on February 16, 2022

"Yo-yo" car sale scams can be a big problem -- so car buyers with poor credit beware. You're prey for shady car dealers.

Scams can apply to new car sales, used car sales, or trade-in deals. Auto fraud can come from unlikely places, such as dealerships and lenders that seem legit.

Basics of Yo-Yo Financing Scams

The scam works by dealers extending financing to credit-challenged buyers for their vehicle purchases.

After the buyer completes the sale, the dealer tries to sell the buyer's loan on the open market for a profit. If they can't make money on the loan, they tell the buyer their financing fell through.

The dealer then either threatens repossession, actually repossesses the car, or forces the buyer to pay a higher down payment.

It sounds illegal, but under current federal law, it might not be. That's because of "conditional sales."

Conditional Car Sales 101

A conditional car sale means buyers will only be allowed to keep their purchased vehicle if their financing is approved. While this might sound reasonable, car dealers have figured out how to game the system using the yo-yo car sale scam described above.

For those with the money to buy a car straight up or get their own private loan to finance their purchase, yo-yo car sale scams aren't a problem. An approved credit application typically comes from a good or excellent credit report, so this scam only works on those with bad credit.

For those buyers with bad credit who can't qualify for their own loans, getting financing terms through the dealership is often the only way they can buy a car. Often these terms can have a higher interest rate, unreasonable monthly payments,

Some States Ban Conditional Car Sales

However, it's not all bad. About a third of U.S. states have laws that prohibit conditional car sales, MSNBC reports.

As for the rest of the country, they're not so lucky.

Spot Delivery Used in Yo-Yo Financing Scams

It is a common practice for dealers to use "spot deliveries" on a car sale. This process says a buyer has the car before the financing is actually finalized. Essentially it takes buyers out of the market for a car, keeping their business with the dealership. But the financing is not truly complete or guaranteed.

There are no typical spot delivery laws because the laws are very different in each state. When used legally and appropriately, your car dealer can you a car quickly. This is helpful when banks are closed, such as after typical business hours or over the weekend. Since the car buying process can take hours, it is common for people to shop and complete their car purchases over the weekend.

Yo-Yo financing scams are a twist on spot delivery financing. The car buyer drives off the lot in their new car, and the dealership keeps shopping around for their financing. However, in the yo-yo scam, their financing doesn't exist and the dealer will call the buyer back to either repossess the car or offer unfavorable new financing terms.

What Can I Do About Yo-Yo Car Scams?

If your credit is less than stellar, the best way to avoid these yo-yo car sale scams is to read the fine print in your purchase contract.

You can also try saving enough to buy your car with cash or you can try getting a loan from trusted friends and family instead of the dealership.

Can I Sue For Yo-Yo Financing?

If you suspect you were a victim of a yo-yo financing scheme, you may be able to sue the dealership. This is a commonly used form of fraud.

If the dealership lied to you and told you that you were already approved, you might have a lawsuit. Talk to a fraud attorney about your case or a possible class action lawsuit against the car dealer.

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