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Car Dealer Yo-Yo: Financing Fraud and Bait-and-Switch Financing

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We receive many phone calls from consumers who complain about being scammed by their car dealer on their financing in what is called a car dealer yo-yo.  Generally, it works something like this:  You go to the car dealer and reach a deal to buy a car.  You complete a credit application and are told everything is all set.   You sign the contract to buy the car, are given the keys to the car, and drive it home.  Then, anywhere from 1 week to 1 month later, you get a call from the car dealer saying that there was a “problem” with the financing or that they could not get the financing “approved”.  Often, you are told that if they put more money down, or if you agree to a higher interest rate, or if you agree to additional payments, the deal will be “approved”.  This frequently happens with new car dealers, but also occasionally with used car dealers as well.

This is often referred to as a car dealer yo-yo, since the dealer is simply trying to get you to go back to the dealer.  This is often simply a form of bait-and-switch financing or financing fraud, by telling you that you were approved and that the car is all yours, and then trying to switch you to a different contract on terms that are often better to the dealer and worse for the consumer.  This has also been referred to as a Puppy-Dog Clause: the dealer hopes that by your taking the car home and showing it to your friends and neighbors and co-workers, you will not want to return it.  The car dealer hopes that you will be too embarrassed to argue over it and will simply pay the extra money to get “approved” and get to keep the car.  To make matters worse (and to put more pressure on you), if you traded-in a car as part of the transaction, the dealer will often tell you that they already sold your trade-in so they cannot “undo” the deal.

In my opinion, a car dealer yo-yo can be a violation of federal law.  However, Florida Courts have sometimes allowed this type of deal as long as the contract states that the dealer has the right to cancel the contract.  Thus, most new car dealers now have a “Seller’s Right to Cancel” provision right in the contract, and sometimes as a separate form.  Under that provision, the dealer claims to have the right to cancel the contract if they cannot get it assigned to a finance company on the terms they want.  They make this claim even though the dealership is identified as the Seller and Creditor under the contract.  Of course, if you try to cancel the contract yourself, the dealer will claim you have no right to do so, and that only they have the right to cancel it.

Here is what really happens in a car dealer yo-yo.  The dealer gets you to sign all the documents for you to purchase the car.  Unless you independently arranged your own financing, the dealer often shops around your loan; this may occur before you sign the contract or after you sign the contract, or both.  The dealer then tries to maximize its profit by finding the most lucrative deal for it to sell your contract to a finance company.  For example, let’s say your contact is based on a 14.9% interest rate.  One company may offer to extend financing with an interest rate of 9.9% and another may offer it at 10.9%.  (Of course, none of this will be communicated to you.)  Because the dealership will often pocket the difference, it may want to assign the contract to the finance company that maximizes its profit.

There are several reasons why the dealer may claim that financing “fell through”.  Many dealers, especially new car dealers, communicate with potential lenders electronically.  This may mean that the dealership should know if you were approved or not even before you signed the final paperwork.  If they knew you had been turned down and they nonetheless told you that you were approved, they simply lied to you.  We have also seen cases where the dealership falsified the consumer’s credit application, which inevitably leads to problems.  Also, some finance companies will not accept contracts where the dealership severely ripped you off on the price of the car or numerous add-ons (extended warranty, service contract, windshield etching, fabric protection, etc.).  This is not necessarily because the finance company cares about you.  Instead, they may be worried that if you default and they must repossess the car, its value is not high enough to pay off the remainder of the loan, which will leave them with a potentially bad loan.  So, the finance company is protecting its own interests in such cases.  In virtually all cases, the dealership could assign the contract to a finance company if it wanted to, but it would not earn as much of (or any) money to meet its profit goals.  So, the dealership tells you the financing “fell through” when it really means that it wants to make a larger profit from the financing.

Here are a few important points if you are stuck in a car dealer yo-yo situation:

  • You do NOT have to sign another contract.  The dealer has no right to force you to sign another contract on different terms.  If you don’t agree to sign a new contract, the car dealer will either be stuck with the previous contract, or if allowed by the contract, can simply cancel it and get the car back from you.  If a dealer previously told you that you were already approved for financing and you were not, this means the dealer lied to you.  If the dealer lied to you before, why would you ever want to do business with that dealer in the future?  Cancelling the contract may actually be beneficial to you in certain circumstances.  You can then go shopping for a different car at a different dealership that will not require you to sign a contract that has a Seller’s Right to Cancel provision (or an arbitration provision).
  • If the dealer has not cancelled the contract, be aware of your first payment due date.  If your contract was not assigned to a finance company and you do not know where to make the first payment, you should try to make the payment directly to the dealer.  We suggest you bring along a friend who can be a witness to your payment.  In many cases, the dealer will refuse to accept your payment.  However, if you do not at least try to make the payment by the date it is due, some dealers will repossess the car by claiming that you failed to make the payment when due.  By paying the dealer, you take away any potential argument that you failed to comply with the terms of the contract or that they had the right to repossess the car.
  • If the dealership says they are cancelling the contract, follow the requirements written in the contract.  Those contractual provisions may require you to return the car within a specified period of time, and provide you a refund of anything you paid.  If you provided a trade-in vehicle, and the dealer claims they already sold it, they may be required to refund you the agreed-upon value of the trade-in vehicle as listed in the contract.
  • Be aware that there may be penalties if you don’t bring the car back if the dealer cancels the contract.  This may potentially include a penalty for each day you keep the car after a specified deadline for returning it to the dealer after cancellation.
  • The dealer may also try to repossess the vehicle.  Accordingly, if you are in the middle of a car dealer yo-yo, we strongly suggest you remove all of your personal property (including all documents) from your vehicle, just in case it does get repossessed.  Another tactic sometimes used by car dealers is to tell you that you need to come in to discuss the situation and possible resolutions; then, when you go back to the dealer and are inside discussing the situation, they seize the vehicle from you.
  • In some cases, the dealership will not be clear if they are cancelling the contract or if they are simply giving you an update.  This uncertainty can be harmful to you, because it means your rights are not clear.  We suggest that you ask them explicitly if they are cancelling the contract.  If they are, you will have to quickly decide what you want to do.  If they are not, this gives you some time to consider your options.
  • If you in the middle of a car dealer yo-yo, we suggest that all your communications with the car dealer be in writing.  This can be by certified mail, fax, email, or text message.  This way, you will be able to prove what they told you.  My personal experience litigating with car dealers over the past 20 years or so has demonstrated that the majority of those dealers will not tell the whole truth about verbal discussions in an attempt to avoid personal responsibility and escape legal liability.

Of course, your specific rights and responsibilities arising from any transaction will depend on your specific facts and circumstances, including the terms and conditions of any documents that you signed.

There are a few specific circumstances involving a car dealer yo-yo where we strongly suggest you contact us right away if this is not resolved to your satisfaction:

  • If the car dealer sues you
  • If the car dealer cancels the contract but refuses to return your down payment to you
  • If the car dealer repossesses the car