Deal or No Deal:How Yo-Yo Scams Rig Auto Loans

Against Consumers

Delvin DavisSenior Research Analyst

April 2012

What is a Yo-Yo Scam?

• Yo-yo scams are based on a practice called “spot deliveries” where the dealership allows the consumer to drive the car home “on the spot” before the financing is finalized.

• The consumer is led to believe the deal is final, or is as good as final.

• The “yo-yo” occurs when, several days later, the dealer calls the consumer back to the dealership, claims the financing fell through, and pressures the consumer to sign a new and more expensive financing contract.

How are Yo-Yo Scams Harmful?

• Yo-yo scams remove consumers from the marketplace so that they do not continue to shop for better deals elsewhere.

• Dealers have several tactics to pressure the consumer to accept a more expensive deal:• Many consumers have had difficulty reclaiming their

trade-in and downpayment after returning to the dealership.

• Dealers often use aggressive measures to force the consumer to return the vehicle, including threatening to bring auto theft charges.

Our Research

• Data on yo-yo scams is very scarce.• To gain information, we conducted an online

survey of professionals that counsel or advise consumers with auto finance-related issues.

• Acquired 32 respondents representing over 2,100 clients in the previous year. • 590 of these clients (27%) experienced a yo-yo.

Research Findings

Finding 1: Respondents reported that, in their experience, car dealers commonly target consumers with poor or no credit standing for yo-yo scams.Finding 2: Respondents observed that half of the consumers they served who had experienced a yo-yo scam had trouble reclaiming their down payment or trade-in vehicle, or had the dealer threaten legal action against them if the car was not returned.Finding 3: Respondents reported that a majority of the consumers involved in a yo-yo scam ended up signing a second financing contract for the same car, and at a higher interest rate.

Demographics of Consumers Experiencing Yo-Yo Scams

OtherAsian Americans

Senior citizensMen

WomenMilitary personnel

People age 25 or youngerWhite Americans

African AmericansLatino Americans

People with low-incomePeople with poor or no credit standing

0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50%

% Respondents Ranking as a High-Target Demographic

Top Reasons Dealers Cited for Yo-Yo Scams

Other

Lender would not approve without the purchase of an additional product

Lender would not approve for the full loan amount

Made a mistake on the paperwork

Lender would not approve the interest rate

Needed more of a down payment

Lender would not approve at the consumer's credit standing

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Percentage of Respondents

Consumers Experiencing High-Pressure Tactics in Yo-Yo Scams

The consumer's payment for tax, title and fees could not be returned

The dealer charged a rental fee, usage fee, or restocking fee for the time the client had the car?

The consumer's down payment was non-refundable

The consumer's trade-in could not be returned or was already sold

The dealer threatened legal action to retrieve the car?

0% 10% 20% 30% 40% 50% 60% 70%Estimated Average % of Consumers

Outcomes of Yo-Yo Scams

Wound up not purchasing any car from that dealer at all

Negotiated a deal for a different car then what they originally purchased.

Negotiated a different deal to keep the same car they purchased.

Wound up with new financing at a higher interest rate

0% 10% 20% 30% 40% 50% 60% 70%

Estimated Average % of Consumers

Policy Recommendation

Whereas…• Dealers use the yo-yo scam to create an unfair bargaining

advantage over the consumer. • Yo-yo scams distort free competition, as consumers cannot

effectively shop the marketplace unless they can trust that a financing offer is a firm and real agreement.

• Conditioning financing on the dealer’s sale of the contract places the risk burden on the consumer, instead of on the dealer where it belongs.

Spot delivery agreements should be banned whenever the condition to finalize is left at the sole discretion of the

dealer.