Yo-yo car financing should be banned, say consumer advocates

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Yo yo

Consumer advocates are calling for an end to "yo-yo" financing, a bait-and-switch tactic car dealerships use to wring more money out of customers. Image from Wikimedia Commons.

“Yo-yo financing” means a car dealership agrees to finance a car for a buyer, then calls him or her back to say financing didn’t work out and asks for more money. Consumer advocates want this outlawed.

Stringing the customer along

Many car dealerships are perfectly honest and engage in fair dealings, but like any business there are bad apples. One particular type of bad behavior is what’s called “yo-yo financing.”

Yo-yo financing, according to the New York Times, is when a dealer arranges financing for a customer, who signs the purchase agreement and drives home. The dealer then calls the customer, sometimes up to a month later, saying the financing “fell through,” and makes the customer return the car to the dealership.

The customer is then told to agree to a higher interest rate, make a larger down payment or return the vehicle outright. Some people, according to MSNBC, wind up with their cars repossessed as a result of the practice. Consumer advocacy groups are asking for the practice to be banned.

In a tight spot

According to Edmunds, the scam works because of “spot delivery,” when cars are sold on the spot, which is how most cars are typically sold, rather than waiting for financing to be approved.

[As long as it has been properly maintained, there’s nothing wrong if one has to buy a old car]

Dealers, according to MSNBC, treat car loans similar to how banks treat mortgages; they agree to lend  to the customer and then sell the loan as a security. If the dealer won’t make enough money, that’s when they will “bait and switch” the customer to get more money out of them.

Contract fraud

The trick with spot delivery is that the contract includes a clause that says approval is “conditional upon approval,” and in some cases is legal. For instance, according to the Baltimore Sun, if a person is not completely forthcoming on their credit application, the yo-yo is justified. However, in some cases, it is a form of contract fraud.

The effects can be egregious. According to a 2011 report by the Center for Responsible Lending, according to Consumer Reports, the typical instance of yo-yo financing resulted in a markup of 2.47 percent to the interest rate, resulting in $714 to the total balance and bilking the public out of an estimated $25.8 billion annually.

Little enforcement

Most of the legal action that has been brought against dealers who yo-yo is in the form of breach-of-contract suits. The Federal Trade Commission has yet to bring action against a dealership that has engaged in yo-yo financing.

However, there are some safeguards against it. First, try to finance through a bank or credit union. Don’t hesitate to contact a lawyer if a dealership does try to yo-yo with financing. It’s illegal in some states, according to MSNBC and, according to About.com, the state attorney general’s office may have some guidelines for people affected by the practice.

Sources

New York Times

Edmunds

MSNBC

Baltimore Sun: http://articles.baltimoresun.com/2012-04-10/business/bs-bz-ambrose-yo-yo-20120410_1_yo-yo-yo-peter-kitzmiller

Consumer Reports: http://news.consumerreports.org/cars/2011/04/beware-of-car-dealer-loan-rate-markups.html

About.com: http://cars.about.com/od/buyingadvice/a/The-Spot-Delivery-Or-Yo-Yo-Financing-Scam_2.htm


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