Car Dealer Demands the Car Back After Sale

Car buyer victims of ‘yo-yo’ financing

Typical Scenario:  Consumer buys car and takes possession of it on a Sunday. During the application process, he provided the dealer with his financial details, including recent pay stubs, while the dealer filled out his application for financing. The consumer signs a sales contract and drives away in the car.

On Thursday, the Consumer receives a call from the dealership, which said it was unable to secure financing and that he must return the car immediately. This quite common scenario is referred to as “yo-yo financing” and it’s caused by another common car-purchasing practice called “spot delivery”: Cars are sold and delivered on the spot, before final approval of the auto loan.

The Consumer told the dealer he would return the car the next day, but before he could do so the dealership repossessed the car from the parking lot of a grocery store where his family was shopping. Worse, the dealer refused to return Daniel’s $1,500 downpayment because the dealership charges that the consumer lied on the application prepared by the salesperson.

Laws regarding yo-yo financing vary by state. While the Car Buyer’s Bill of Rights in California, mandates disclosures and consumer protections for retail vehicle sales by licensed car dealers, most sales contracts include a “seller’s right to cancel” noting that the seller is trying to arrange financing at a speculative rate.  Under California law, consumers must get their downpayments and/or trade-ins back. In addition, the dealer can’t charge you for the time you had the car.

Before agreeing to drive away in a newly purchased car, make sure you read the contract and ask what will happen if no financing can be arranged. Because banks usually don’t approve loan applications at night or on weekends, consider shopping for a car during business hours so that you can be assured your loan has been approved at a rate you are comfortable with.

Even better, shop around for pre-approved auto loans from banks or other lenders so that you will have a good idea of what rates you’ll qualify for.

Familiarize yourself with your state’s laws on auto purchases and financing. In California, for example, from your financing arrangement, the dealer cannot receive more than:

• 2% of the loan amount for terms more than 60 months, or
• 2.5% of the loan amount for terms 60 months or less.

For more information, read:

• California Car Buyer’s Bill of Rights. Consumer Action explains the important rights that this state law gives to car buyers.
• Q&A About Financing a Car. Consumer Action provides in-depth background on financing an auto purchase.
• Understanding Vehicle Financing. This publication by the Federal Trade Commission provides facts on dealership financing—what it is, how you apply, special financing offers, cash back and rebates you may be eligible for, and more.
• Practices to Avoid in Your Next Auto Loan. The Center for Responsible Lending offers a run-down on hidden abuses during the car buying process.