Many new and used car buyers rely on the financing available at the dealership to pay for their cars. Find out why you might benefit from looking elsewhere to finance your new car, and what you should watch out for if you get your auto loan at the dealership.
Shopping Around for Auto Financing Could Mean Better Rates
The first and most obvious reason not to get your auto loan at the dealership is that there are probably better deals available from other lenders. If you have a bank account or are a member of a credit union, your financial institution will probably be able to offer financing at a lower interest rate, and with better terms than you will find on the lot. Your bank or credit union already has a financial relationship with you. They also can likely transfer funds from your other accounts if you miss a payment. Because of this, lending to you is less risky, and they can put a lower price tag on that risk.
If you walk into a dealership without knowing how you are going to pay for the car, the dealership has all the leverage. Psychology says that once you have a thing, you will work hard to keep it. At the dealership, the car salesperson will help you find the car of your dreams, and only then will talk about financing. That way you will say yes to a higher interest rate rather than walk away from “your new car.”
Getting Your Auto Loan at the Dealership Puts You at Risk of Yo-Yo Financing Schemes
So far, nothing we have talked about is illegal. It’s just the psychology of the deal. However, many Michigan dealerships go further than that, crossing the line from manipulation into auto fraud schemes. One of those schemes is the yo-yo financing contract. Here’s what it looks like.
Kelly walks onto a used car lot on a Friday evening around 4:00 p.m. and finds a sedan that will suit her needs. She asks the salesperson for financing through the dealership’s lender. That financing includes terms like the down payment, monthly payments, length of the loan, and interest rate. At around 6:30, she and the salesperson seal the deal. Kelly signs the financing agreement, gets the keys and drives away in “her new car.”
Then on Monday, Kelly gets a call from the dealership. The salesperson who sold her the car tells her the lender couldn’t approve the loan as written. He says Kelly will need to pay an additional $2,000 or agree to a 1% hike in the interest rate on her car. When Kelly pushes back, the salesperson says that he will get fired unless she helps him straighten out this mistake. When she still won’t agree, he threatens to report the vehicle as stolen. Kelly gives in and says she’ll return the car, only to be charged a restocking fee when she brings it back in. Even worse, Kelly is told that her trade-in vehicle has already been sold.
What to Do if Your Dealership Tries to Take Back Your New Car
What happened to Kelly is illegal. The Truth in Lending Act and the Michigan Credit Reform Act both prevent yo-yo financing schemes and give consumers protection when dealers try to take advantage of them. But dealerships still use yo-yo financing against unknowing consumers all the time. If you find yourself caught up in this auto loan fraud you should:
- Carefully review all the documents you got from the dealership – under Michigan law, if the dealership is unable to sell the loan, the dealer must honor the contract by accepting the payments due under the contract as written; thus, if you want to keep the vehicle, you must make timely payments directly to the dealer.
- If you would prefer to rescind the deal, you have the right to return the vehicle and refuse to make any payment, as well as get any down payment or trade in value back without a “restocking fee.”
- Demand a financing denial letter from the lender
- Remove all of your personal belongings, including the paperwork on the deal, from the vehicle – unscrupulous dealers have been known to illegally repossess the vehicle when this type of dispute arises.
- Keep an eye on your credit history – unscrupulous dealers may continue to illegally “shop” the loan, causing numerous inquiries to appear which will in turn lower your credit score.
- Talk to a consumer protection attorney
State and federal laws give consumers the ability to go after dealerships and lenders that use illegal lending techniques to take advantage of them. At The Liblang Law Firm, P.C., we have decades of experience helping people who get caught up in yo-yo financing. We can help you identify your options and put shady lenders in their place.
Dani K. Liblang is a consumer protection lawyer at The Liblang Law Firm, PC, in Birmingham, Michigan. She helps the victims of auto fraud schemes protect their rights and their property. If your car has been repossessed on a dealer’s loan, contact The Liblang Law Firm today for a free consultation.