If you are in the market for a new or a new-to-you car, beware of a common car financing scam. While it goes by many names, such as yo-yo financing, or spot financing, the details remain the same: a buyer purchases a vehicle and believes that they have taken out a car loan. Days or even weeks later, the financing company or the dealership contacts the buyer to let them know that they didn’t qualify for the loan as written. Buyers are often asked to take a loan with less favorable terms, including higher interest rate or a longer term, or to bring additional cash to the transaction.
One of my readers had this experience recently. Sue attended a Navy Federal Credit Union sponsored Auto Sale, found a car that she liked (from a local dealer, not from Navy Federal) and applied for financing. For some reason, Sue’s financing application was not through Navy Federal Credit Union but through another financing source. A few days later, the dealer called to say that Sue’s finance application was denied and she would have to either return the car, bring additional cash for a larger down-payment, or take a different loan with a higher interest rate. Sue was completely shocked and called me for help.
That Sounds Crazy
Turns out, this situation is entirely legal and fairly common. Often, when you get on-the-spot financing for a vehicle purchase, you are not actually financing the purchase at that time. You are basically making an application for financing and giving the dealership or financing company the right to put together a loan for you. All this is in the contract, but most people don’t read all the parts of their sales contract. Even if a smart buyer reads the whole contract, the language is often foreign and confusing. A typical contract will say something such as “The contract may be rescinded or rewritten with 30 days of the date of the contract.”
How Can You Avoid This Situation
The easiest way to avoid this situation is to pay cash for your cars. You know I am anti-car payment, even though paying cash may limit your buying options.
If you must finance, or you can get a super interest rate and you’re comfortable with financing, come to the dealership with your financing already organized and fully approved. Credit unions are a great way to find low rates and favorable terms.
If you really want to use dealer financing, perhaps because of a fabulous promotional rate, don’t take the car home until the financing is complete and you have a contract that is not subject to revocation or rewriting. Yes, this may require some additional trips to the dealership, but it is worth it.
In 2014, approximately 85% of new car purchases were subject to a vehicle loan, and just over 50% of used car purchases had some sort of vehicle financing. Car loan buyers need to be aware of the tricks of car financing so that they can protect themselves.