Main Blog Article Content
5 MIN. READ
The WSVN 7News show Help Me Howard featured a cautionary tale on the risks of financing through a dealership. A consumer headed to a South Florida dealership to find a car after starting a new job. He was given the green light for dealership financing, made his down payment, and drove off with a 2015 Lexus IS250. This should have been a time for excitement and celebration.
Instead, he heard back from the dealership two weeks later with some bad news. The loan hadn’t gone through as planned. He was given a choice: bring more money or the dealership would repossess the car.
Initially the dealership refused to even return his down payment. However, after help from the show's host, he was finally able to get part of his money back, but still lost out on the car.
This practice, known as yo-yo financing or spot delivery, is highly unethical and illegal. However, many dealerships get away with it. It’s not the only potential problem with financing a car through a dealership since dealers can legally charge you more in interest.
Let’s take a closer look at the pros and cons of financing a car through a dealership and go over some tips for protecting your finances and your new purchase.
The appeal of saving time and going through a simple financing process is why close to 90% of car loans are issued at the dealership.
However, taking the time to shop around for a loan and get pre-approved is by far the best decision for your finances. Here’s why.
What Is Spot Delivery in Dealership Financing?
Spot delivery is a bait-and-switch scam. The dealer gathers all the information necessary to secure financing but delays financing for one reason or another.
Instead, they offer to let you take possession of the vehicle while waiting for financing to go through and will usually reassure you that the delay is nothing to worry about.
What happens next? The dealer calls you back a few days later with some bad news. Financing didn’t go through, and you need to either bring the car back and usually lose your down payment, or agree to new financing terms. Needless to say, the new terms include a higher interest rate and potentially a higher down payment as well.
The FCC is cracking down on this practice, which is illegal under the Truth in Lending Act, but many dealerships continue getting away with it. This happens mainly because consumers fail to report these unethical practices and because dealers trick buyers into thinking this practice is legitimate.
Is Yo-Yo Financing Different?
Yo-yo financing is a slightly different scam. With yo-yo financing, the buyer is under the impression that they have secured financing through the dealer.
A closer inspection of the paperwork reveals that the dealer can revoke the financing agreement. A few days after the sale, the victim gets a call from the dealer claiming that an issue came up and that financing fell through.
What follows is similar to the spot delivery scam. The dealer will offer new financing terms with a higher interest rate.
How Can I Avoid Yo-Yo Financing at a Car Dealership?
Unfortunately, unethical car dealers don’t hesitate to lie and misrepresent transactions, making it difficult for consumers to see through their harmful practices.
Being aware that these scams exist is important. You should also carefully go over any paperwork you sign at the dealership and make sure that there is no language allowing the dealer to revoke the financing agreement or deliver the car without having a financing agreement in place.
Online reviews and word-of-mouth recommendations are another good strategy for finding a trustworthy South Florida auto dealer.
The safest way to finance a new or used vehicle remains to avoid financing at the dealership altogether. Do your own research and find a lender without the help of a dealer.
Not all car dealers are out to scam you. However, there are legal ways for car dealerships to charge you more for financing.
What Happens When You Apply for a Car Loan at the Dealership?
After the dealer collects your information, they will share it with several lenders. These financial institutions will then get back to the dealer with a proposed interest rate.
This interest rate, known as the buy rate, is the minimum these lenders are willing to charge you. Dealers can then add a markup and present you with financing offers with a premium interest rate.
Many lenders don’t have an upper limit for how much dealers can add, but many request that dealers don’t add more than 2 to 2.5 percentage points to your APR.
This practice is completely legal and allows dealers to increase their profit margin. Plus, dealers are under no obligation to disclose the buy rate lenders proposed, creating a situation where there is no transparency into what your financing options actually are without the dealer’s markup.
Dealers can also be selective about the loan options they present. For instance, if a lender limits the amount of the markup they can add, the dealer can skip this option and guide you toward a lending product that comes with a higher profit margin for them.
A pre-approval comes with many benefits:
At Power Financial Credit Union, our mission is to make car financing accessible and affordable. With up to 100% financing and low APRs, our car loans are flexible and work with your budget. Plus, we simplify the entire car shopping process with car buying concierge services.
Explore our new and used auto rates and use our auto loan calculator to better understand how a car loan payment will fit into your budget.
The WSVN 7News show Help Me Howard featured a cautionary tale on the risks of financing through a dealership. A consumer headed to a South Florida dealership to find a car after starting a new job. He was given the green light for dealership financing, made his down payment, and drove off with a 2015 Lexus IS250. This should have been a time for excitement and celebration.
Instead, he heard back from the dealership two weeks later with some bad news. The loan hadn’t gone through as planned. He was given a choice: bring more money or the dealership would repossess the car.
Initially the dealership refused to even return his down payment. However, after help from the show's host, he was finally able to get part of his money back, but still lost out on the car.
This practice, known as yo-yo financing or spot delivery, is highly unethical and illegal. However, many dealerships get away with it. It’s not the only potential problem with financing a car through a dealership since dealers can legally charge you more in interest.
Let’s take a closer look at the pros and cons of financing a car through a dealership and go over some tips for protecting your finances and your new purchase.
Are There Any Pros to Financing at the Dealership?
Financing a car through a dealership is convenient, especially if you’re pressed for time. A dealer will typically gather information from you, run it through a few lenders, and get back to you with an offer within minutes.The appeal of saving time and going through a simple financing process is why close to 90% of car loans are issued at the dealership.
However, taking the time to shop around for a loan and get pre-approved is by far the best decision for your finances. Here’s why.
Yo-Yo Financing and Why Dealership Financing Is a Bad Idea
While financing a new or used car purchase directly at the dealership can save time, it leaves you vulnerable to a type of scam known as yo-yo financing or spot delivery.What Is Spot Delivery in Dealership Financing?
Spot delivery is a bait-and-switch scam. The dealer gathers all the information necessary to secure financing but delays financing for one reason or another.
Instead, they offer to let you take possession of the vehicle while waiting for financing to go through and will usually reassure you that the delay is nothing to worry about.
What happens next? The dealer calls you back a few days later with some bad news. Financing didn’t go through, and you need to either bring the car back and usually lose your down payment, or agree to new financing terms. Needless to say, the new terms include a higher interest rate and potentially a higher down payment as well.
The FCC is cracking down on this practice, which is illegal under the Truth in Lending Act, but many dealerships continue getting away with it. This happens mainly because consumers fail to report these unethical practices and because dealers trick buyers into thinking this practice is legitimate.
Is Yo-Yo Financing Different?
Yo-yo financing is a slightly different scam. With yo-yo financing, the buyer is under the impression that they have secured financing through the dealer.
A closer inspection of the paperwork reveals that the dealer can revoke the financing agreement. A few days after the sale, the victim gets a call from the dealer claiming that an issue came up and that financing fell through.
What follows is similar to the spot delivery scam. The dealer will offer new financing terms with a higher interest rate.
How Can I Avoid Yo-Yo Financing at a Car Dealership?
Unfortunately, unethical car dealers don’t hesitate to lie and misrepresent transactions, making it difficult for consumers to see through their harmful practices.
Being aware that these scams exist is important. You should also carefully go over any paperwork you sign at the dealership and make sure that there is no language allowing the dealer to revoke the financing agreement or deliver the car without having a financing agreement in place.
Online reviews and word-of-mouth recommendations are another good strategy for finding a trustworthy South Florida auto dealer.
The safest way to finance a new or used vehicle remains to avoid financing at the dealership altogether. Do your own research and find a lender without the help of a dealer.
Legal Ways Auto Dealers Can Charge You More
Not all car dealers are out to scam you. However, there are legal ways for car dealerships to charge you more for financing.What Happens When You Apply for a Car Loan at the Dealership?
After the dealer collects your information, they will share it with several lenders. These financial institutions will then get back to the dealer with a proposed interest rate.
This interest rate, known as the buy rate, is the minimum these lenders are willing to charge you. Dealers can then add a markup and present you with financing offers with a premium interest rate.
Many lenders don’t have an upper limit for how much dealers can add, but many request that dealers don’t add more than 2 to 2.5 percentage points to your APR.
This practice is completely legal and allows dealers to increase their profit margin. Plus, dealers are under no obligation to disclose the buy rate lenders proposed, creating a situation where there is no transparency into what your financing options actually are without the dealer’s markup.
Dealers can also be selective about the loan options they present. For instance, if a lender limits the amount of the markup they can add, the dealer can skip this option and guide you toward a lending product that comes with a higher profit margin for them.
What Are the Benefits of Getting Pre-Approved for a Car Loan?
Getting pre-approved for a car loan is easier than you think. Most credit unions and banks have online processes that only take a few minutes of your time.A pre-approval comes with many benefits:
- You’ll know exactly how much you can afford to spend on your new or used vehicle and understand how monthly payments will fit into your monthly budget.
- The lender you choose will issue a loan without a markup. Your APR could be two percentage points lower, and you could save even more!
- You can take the time to compare lenders and have full transparency into the interest rates and lending terms available to you.
- You can pick the lender of your choice with no pressure from the dealer. For instance, you can go with a credit union to benefit from a lower APR.
- You won’t have to worry about financing scams from car dealerships.
- There is no pressure to make a financing decision on the day of the purchase.
Skip Dealership Financing With PFCU
If you’re in the market for a new or used vehicle, we strongly recommend securing financing on your own.At Power Financial Credit Union, our mission is to make car financing accessible and affordable. With up to 100% financing and low APRs, our car loans are flexible and work with your budget. Plus, we simplify the entire car shopping process with car buying concierge services.
Explore our new and used auto rates and use our auto loan calculator to better understand how a car loan payment will fit into your budget.