Beware of Fake Car Financing

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.

Sue’s Experience

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   A typical contract will say something such as “The contract may be rescinded or rewritten with 30 days of the date of the contract.”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.

About the Author

Kate Horrell
Kate Horrell is a military financial coach, mom of four teens, and Navy spouse. She has a background in taxes and mortgage banking, and a trove of experience helping other military families with their money. Follow her on twitter @realKateHorrell.
  • KenLand

    I had a car finance get belligerent because I caught them lying about the APR. I called USAA up and confirmed my suspicions.

  • George

    This has happened to myself… I took my old car back and let them take the car back. This is extremely common from what I hear

  • Steve Berkshire

    I pay cash for vehicles. You can usually get them at invoice that way. MSRP on my 2015 F150 was 57k, but invoice was 46k.

  • Leon Suchorski

    When I bought my present car, I had my finances set. I went in and the used car man would not give me what I knew my trade in was worth. So we haggled until he got very close to what I knew the car was worth. We were set on the price for the new car, so the salesman just asked me, “Will that be cash or check?” I thought to myself that that sounded funny, since who carries around that many thousands in their pocket? So I wrote my check, and went home with a new car.

  • 4M

    Not always is it cheaper to use cash.

    1) The dealer gets kickbacks for financing, and if they think you are going to finance they might give more wiggle room with the price

    2) Sometimes incentives are tied to financing, I just bought a car not too long ago, nego’ed it down to the lowest price that anyone had reported on a few websites, and still got another $1,000 back from parent company financing and at 0.9% (I could have paid cash, but why bother when the extra $1,000 is more than the cost of capital, not to mention I can get better than 0.9% as a risk free rate.

    But if you are financing the dealer can tack on loads of extras because it seems cheap spread over 36-60 months.

    And if you over extend, or have bad credit you can get the old switch-a-roo.

    I’ve never had the switch a roo pulled in five car purchases, but I also handle every part of the car buying experience as a separate transaction:

    1) Figure out what you want, and the best deal on it
    2) check your credit score
    3) get pre-approved by NFCU,USAA or a CU so you have an alt to dealer financing
    4) nego price, you can even let them appraise your old car, but do not sell it to them
    5) check out dealer financing (they can go 0.0% as they want to sell the car, the CU’s cannot).
    6) Buy the car, take delivery, if they change the terms you can just return the car
    7) Sell your old car to someone else on base for what the dealer offered for it plus your sales tax rate, or even try for more, cars can fetch a pretty penny especially if you have service records.

    The only downside to my plan is you can’t be upside down on your car, and in some states selling a car with a lien can be a pain.

  • znut

    This is very common especially over a weekend, the dealer assumes that the credit will be good based on a preliminary look at the buyers credit, does the loan assuming that they are going to be able to sell that loan to a bank the following week.

    There was a Nissan dealer that was put off limits by Ft Bliss many years ago over the same scam. In one case that took the trade to the auction and sold it and then called the buyer with this crap.

  • DC@nc

    I stopped buying brand new YEARS ago! The depreciation of a new vehicle once the buyer leaves the lot is much too great. I know, because I tested this theory. I contracted a new car, drove off the lot to another dealer of the same make/model and the car had depreciated tremendously! Another reason not to buy brand new is pending mechanical issues from things like metal shavings in the engine and other “kinks” that must be worked out, of which the dealership offers the buyer regularly, scheduled maintenance to “defray” problems of this sort with the vehicle. Miss one visit, or take it to a non-affiliated mechanic, and the contract and/or warranty is violated and more issues present themselves. Beware of the 0.0% financing by the dealer, too! Read the entire agreement before agreeing to terms and if you cannot understand it have it re-written in terms you CAN understand (I’ve done this). Your terms (interest rate, amount of payments, etc.) just may change after a certain number of months. And, lastly, try to avoid dealer financing, if possible, simply due to the fact that you’ve already established a “relationship” with YOUR CU/bank and are probably not familiar with the dealer’s financier. Chances are, your contract won’t be bought out by another financier after a term when dealing with your financial institution where, with the dealer’s there is a 50/50% chance it will and may impact your payment terms.