Yo-Yo Sales: the Spot Delivery Scam

In a spot delivery, the dealer delivers possession of a vehicle to a customer before financing has been approved.

Spot deliveries are a common and acceptable sales tactic at car dealerships.

Dealers consider spot deliveries the best way to get a sale done fast, before the buyer goes elsewhere or looses interest. A cardinal rule in car sales is get it done TODAY. Studies have shown that buyers who get away today seldom return to the same dealership tomorrow.

For the well heeled buyer with a top credit score, who usually shops carefully for the best dealership, this is seldom a problem. Banks or manufacturer's finance arms (GMAC, Ford Motor Credit) generally fax back loan approvals within the hour. Ford approved my last loan in less than one minute via computer. (I am not wealthy, but protect my credit score zealously.)

In a majority of spot deliveries, the dealer can shop the contract around to third party loan providers after the consumer has taken the vehicle. Eventually the contract is assigned to a lender without any changes and the sale is completed without a hitch.

While in most states delivering on the spot is not illegal, and may benefit both parties, the practice lends itself to the version known as the yo-yo finance scam. This is essentially a bait and switch financing rip-off.

Some dealers may knowingly exploit the unwary consumer with weak credit.

These folks are attracted to instant credit approvals and on the spot financing.

People squeezed by these bait and switch financing schemes are the most vulnerable, those with spotty credit and/or low income. They tend to arrive at a dealership with a trade-in which needs work, seeking a comprehensive solution.

They view the trade-in, new car price, and financing as a single transaction.

Nope, these are three deals, and smart consumers keep them separate.

Dealer-arranged financing is a gross conflict of interest: spotting the best financing terms is the customer's job, not the dealer's.

Middle to lower-income customers should get their credit scores before considering their next car purchase. This should be done ahead of any urgent need to trade.

Instant Gratification

Especially where the old ride is an eyesore and/or has become unreliable, signing a Retail Installment Sales Contract (RISC) seems the easy way out.

Surprise! You're approved for a brand new car. Oh goody, my neighbors will be impressed.

In the euphoria of quick approval, spot buyers are often asked to sign a contract addendum. This "minor change" can be called by a number of names like "conditional sales rider" or "bailment agreement."

These documents state that, despite delivering the vehicle, the sale doesn't actually close until financing approval comes back from the lender.

In many states, this is still legal if properly signed. The rider may further provide that if the loan falls through, the buyer must either pay the balance in full, come back to cut new papers for higher/longer payments, or deliver the vehicle back to the dealer.

Some stipulate payment for any damage, rental fees and “excessive mileage” charges.

Good dealers can usually confirm financing terms within 72 hours, but rejections by a series of financial institutions may extend the process by days or weeks for those with low scores.

When dealers provide instant delivery, important financing terms in the contract might be left blank.

The customer's stress is relieved once the paperwork is signed and the car is spotted at the front door. With the deal seemingly done on acceptable terms, they enjoy the first few very expensive hours of new car ownership.

After the Gold Rush

A period of time goes by, ranging from days to weeks, then the dealer calls with the bad news: financing has not been approved.

The buyer is then asked to either surrender the vehicle, or re-open negotiations on loan terms and rates.

In some cases the customer may be contacted by a lender asking for W-2s, tax returns, and other financial documents.

Co-signers, not mentioned before delivering the car, are sometimes requested.

If the consumer traded in a used vehicle, dealers may claim that it has already been sold. If they promised to pay off the old lien, the former lender may call the buyer, saying payments have not been made.

Welcome to the Hotel California: Trapped

Maybe driving the car home the buyer will have fallen in love with it, shown it to neighbors and relatives, and accumulated some wear.

This psychological investment, not to mention the down payment or trade-in held hostage, compel many to agree to unfavorable new financing terms.

The embarrassment of a repossession department tow truck is often enough to finalize the new, but often backdated, deal.

What does the dealer get out of this car loan bait-and-switch? Commissions and kickbacks from sub-prime lenders sweeten the deal. This is where the real money hides in the low-margin new car business.

In complaints to consumeraffairs.com, many of the customers who took spot deliveries did not originally intend to take delivery on the spot, but were pressured into accepting the car that day.

"Oh, we're sorry, was that the last bus?"
"We have an immediate buyer for your trade if you hurry."

Spot Delivery: Extra Insurance?

Insurers have begun marketing policies offering 7 to 30 days of “temporary” auto insurance coverage, for both liability and physical damage, to the car buyer. This allows dealerships to close the sale quickly.

Folks who already have car insurance are covered in the new car under their existing policy and should reject spot delivery insurance.

Drivers acquiring their first vehicle, with no existing coverage, should seek insurance before visiting the dealer.

Insurance is a significant factor in the new car total cost of ownership: a dealer is not the place to be buying insurance. Young males, attracted to sporty high risk cars, are especially effected.

The Defense Never Rests

Texas' Lemon law does not specifically outlaw spot delivery scams, but laws such as the Texas Deceptive Trade Practices Act can be uses as the basis of a civil action.

This is a job for competent legal counsel, but suing the dealership is time-consuming, stressful, and may not succeed.

The best thing is to avoid the yo-yo fraud in the first place, by shopping the dealership as hard as you shop the deal.

Attorneys for dealerships say spotting is not scamming.

Financing can fall through because of incomplete or inaccurate data innocently provided by the buyer. They say a certain percentage of customers are dishonest on financing applications, and take deliveries they don't deserve.

Many folks simply cannot read the legalese in the contract. In court defense counsel will ask if the plaintiff always reads everything they sign, and set a trap.

Lessons from the Spot Rip-off

A central theme of texas-cars-and-dealerships.com is "take your time," stretch the car buying process out to include researching the brand, car, and dealership. If credit repair is needed, begin a long term appraisal, there are plenty of websites to help. The last place to seek this help is a car dealer.

Don't arrive at a car dealership in a condition of desperation: having a limping jalopy as a trade in marks you as a sucker.

The need for a car right away, like "today," typifies the dealership's perfect car buyer. I would never buy or accept delivery of a car on the first dealer visit.

Selecting a reputable car dealer, and there are many spotless auto dealerships that don't use shady tactics, should be a financial priority.

Carefully read all contracts before signing. No blanks should be left in the contract.

Wait until financing is approved in writing before you take possession of the vehicle.

Do not sign a conditional sales rider, whether an addendum or incorporated as boiler plate in the main contract.

Before purchasing a new vehicle, print out a copy of your credit scores and evaluate your eligibility for the loan. Shopping for financing, at the bank or credit union, before you go to the dealer, is an essential part of success.

Often pre-approved financing will give you a blank check valid up to a certain limit.

If you have bad credit, a trade-in, and haven't secured your own financing you are the perfect target for the yo-yo financing scam.

Buyer Beware.