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A yo-yo auto financing scam can harm your credit score

Many vehicle dealerships are upstanding and honest, but unfortunately, some are not and will not hesitate to take advantage of consumers in weak positions to question wrongful sales tactics. A common scam that can cause major legal trouble – and harm credit scores – for car buyers is called the yo-yo scam. 

Anatomy of the scam

In this scheme, the shady car dealership sells you a car, and tells you that the transaction is final. They have you fill out a buyer’s order and loan documents and pay a deposit. They tell you the car is yours and have you put it on your insurance. However, in this scenario, the dealership has not in fact obtained a commitment from a finance company to actually accept the assignment. Despite the fact that they have told you the deal is finalized, the dealership continues to run your credit with a variety of finance companies. If the dealership is not later able to get a finance company to finance the deal, they may try to get you to sign a different deal, or to back out of the transaction completely. This would be after you have had the benefit of the car for a few days – the seller often says they need to return the vehicle because the financing fell through. Because the buyer has become attached to the car or has told others about their new purchase, they feel pressure when the dealer follows up with a demand either to bring the car back or agree to a more expensive financing deal.

Lots of problems for the consumer can occur in this situation. They may have left their old car as a trade-in or made a down payment and have trouble getting either back. They may have no other transportation or feel personal pressure that causes them to agree to an unfair, expensive financing arrangement to keep the vehicle. More pressure may come from the seller threatening to sue for the car, have it repossessed or enforce the “contract” – or even report to law enforcement that the customer stole the car.

Damage to credit scores

Dealers more often use this fraudulent scam to target people with lower incomes or already weak credit ratings, who are likely to be more desperate to get financing and therefore to agree to an unscrupulous deal. A major related problem is that in the process of trying to find financing for the consumer, the salesperson or multiple financing companies considering the contract may run the person’s credit repeatedly. And if the deal falls through, the buyer may have to shop around further to try to find credit for a car, resulting in more credit inquiries.

Credit inquiries show up on the person’s credit report and can lower their credit score – how much varies depending on their credit history. Multiple credit inquiries are seen as signaling that the subject is a higher credit risk.

Takeaways

If you are able to go to the dealership with your financing already lined up through your own bank, that is almost always preferable – it guarantees the financing and often gives you better terms. It also gives you some negotiation leverage on the sales price, since no one has to worry about the risk of not getting financed. If you have to use dealer financing, when they have you sign a credit authorization, make sure you insert a time limitation for the authorization – e.g., for a period of five days from date of signing. That way, it will be clear that any credit pulls after that time are not authorized. If the dealer tries to make you sign new paperwork after you have already signed one set, remember that you have no obligation to do so and can insist on the original terms of the deal. Keep your purchase paperwork in your house, not your car – if the dealer gets aggressive and illegally repossesses your car, you will still have your paperwork proving the sale.

If you are victimized by this scam, you do have legal options – contact an experienced consumer attorney for assistance.

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