If you’re looking to buy a car but your credit isn’t great, here’s what you need to know to not become a victim of a dealer’s financing scam.

So, you buy a new or used vehicle and a few days later the dealer tells you there’s a problem with your financing. Should you be concerned? Definitely! You could be the target of a “yo-yo” financing scam. That’s when you’re pulled back into the dealership to renegotiate the deal – usually at a higher interest rate and worse terms. In this article, we’ll look at who’s at risk, how these scams work, and how to protect yourself.

Who Is at Risk?

While most car dealers are honest, some predatory dealers will take advantage of their customers. In this scam, shady car dealers often target people with poor credit, lower-income buyers, and others who may be vulnerable: young or old people, minorities, and recent immigrants.

How Auto Yo-Yo Scams Work

Let’s take a look at how a typical scam works: First, you’ll find a vehicle you like, usually at a used car dealership, often one that advertises easy financing for people with poor credit.

While most car dealers are honest, some predatory dealers will take advantage of their customers.

The dealer will extend you credit through the dealership and offer you a conditional financing agreement on the spot. This is sometimes called “spot delivery,” in which a dealer lets you take the car before the financing is complete. You believe it’s a done deal, so you hit the road.    

A few days or a few weeks later, the dealer will call you and say that your financing wasn’t approved after all. You might hear one of these reasons:

• The dealer may claim that the loan didn’t get final authorization because of your credit standing.
• They might also say they need more of a down payment.
• You could also be told it was just an innocent paperwork mistake.

Whatever their story is, the dealer will demand that you come back to sign a new financing agreement – or you’ll have to give up the car. However, the new deal is a ploy to steer you into an outrageously expensive loan – with a much higher interest rate and a bunch of phony extra charges.

If you balk at the changes, they might threaten you with legal action or repossession of the vehicle. Additionally, they might hold your trade-in vehicle or down payment hostage unless you agree to the new loan terms. A predatory dealer will try any trick in the book to get you to sign a new, and much worse, financing agreement.

Watch Out for These Red Flags

When buying your car, watch out for these red flags, which could be a sign that you’re being set up for a yo-yo scam:

• Contract with parts left blank. You’re asked to sign a contract with some parts left blank.
• Unclear terms. The contract is unclear about the terms of your deal and what interest rate you’ll be paying.
• “Conditional” terms. You’re asked to sign a form that says the deal is conditional.
• No agreement in writing. The dealer may let you drive away in the car without any contract at all.

How You Can Protect Yourself

Now that you know what to look for, how can you protect yourself from an auto financing scam?

• Get preapproved. Get preapproved for a car loan from a trusted financial institution before visiting the dealership. This way, you’ll have a better idea of your car-buying budget and can be sure that financing won’t become an issue later.
• Do your research. Look up reviews for the dealership or any potential lender online. Even if they’re not committing fraud, they may have a reputation for not having your best interests in mind. Search Yelp, Google, and/or the Better Business Bureau (for your state) with the name of the dealership or lender, or look them up on DealerRater.com.
• Pay cash. If the car is relatively inexpensive, consider saving up and paying in cash.
• Verify terms. If you do choose dealer financing, make sure that all parts of the loan contract are filled in and signed by both you and the dealer before you drive off the dealer’s lot.
• Don’t sign. Don’t sign anything that you don’t understand or that you’re uncomfortable with.
• Get copies. For your protection, get copies of everything you’ve signed.

What to Do if You’re a Victim of This Scam

If you’ve been the victim of a yo-yo auto financing scam:

• File a complaint with the Federal Trade Commission at FTC.gov.
• Contact the Consumer Financial Protection Bureau at gov.
• If a dealer persists in making threats, you can seek help from the National Association of Consumer Advocates at org.

When you’re looking to purchase a vehicle, remember these tips – and don’t get reeled in by a yo-yo scam. To learn more about managing your finances, talk to your financial institution today.