Yo-Yo Financing: What It Is and How to Avoid It

Yo-Yo Financing: What It Is and How to Avoid It

What is Yo-Yo Financing?

Yo-yo financing is a deceptive practice where a customer is offered a car loan with a very low interest rate, only for the dealership to retract the offer later. The term ‘yo-yo’ aptly describes this process, where the customer drives away with a new car, only to be pulled back by the dealer under the guise of financing issues.

This often leads to the dealership presenting a substitute financing option with a significantly increased interest rate, leaving customers in a financial bind.

The Mechanics of Yo-Yo Financing

Initial Lure with Attractive Terms
Dealerships attract buyers with offers of unrealistically low interest rates or favorable loan terms. These initial terms are often too good to be true and are used to get the buyer to sign the purchase agreement and take the car home.

Temporary Conditional Contracts
The initial agreement may be conditional, meaning it is subject to final financing approval. This allows the dealership to retract the initial offer if they claim financing was not approved.

Post-Purchase Call
After the buyer has taken the car home, the dealership contacts them, claiming that the initial financing terms have fallen through. This call is used to pressure the buyer into returning to the dealership to renegotiate the loan terms.

Pressure to Accept New Terms
Once the buyer returns to the dealership, they are pressured into accepting a new financing agreement with significantly higher interest rates or less favorable terms. The dealership may use various tactics to convince the buyer that they have no other option.

Threat of Repossession
Dealerships may threaten to repossess the car if the buyer refuses to agree to the new terms. This threat is often enough to coerce the buyer into signing the new agreement.

Impact on Credit Score
The change in financing terms and the potential for repossession can negatively impact the buyer’s credit score, making it more difficult for them to secure favorable financing in the future.

Dealership Retains Control
Throughout the process, the dealership retains control by exploiting the buyer’s lack of knowledge and urgency to keep the car. This manipulation is central to the mechanics of the yo-yo scam.

Targeted Consumers

Typically, buyers with poor credit and limited financing offers are most prone to falling victim to yo-yo financing scams. The repercussions for these victims can be severe, with some people experiencing car repossession or being stuck with a loan despite no longer owning the vehicle.

These situations highlight the importance of consumers maintaining vigilance about the agreed financing terms and the car dealers they patronize.

The FTC and Yo-Yo Financing

The Federal Trade Commission (FTC) recognizes yo-yo financing as a deceptive and harmful practice for car buyers. In response to a growing number of complaints and recognizing the financial strain it placed on consumers, the FTC established the Combating Auto Retail Scams (CARS) program in December 2023. This initiative, partnered with organizations like the National Automobile Dealers Association, aims to crack down on misleading dealership practices. The rule was originally scheduled to take effect in July 2024 but is currently under legal challenge.

Here are some key provisions of the Rule:

  • Clear Advertised Prices: Dealerships must advertise clear and final vehicle prices, eliminating confusion and bait-and-switch tactics.
  • Ban on Misleading Practices: Deceptive sales tactics often used in yo-yo financing, like promises of financing later retracted, will be prohibited.
  • Penalties for Violations: Dealerships caught violating the CARS Rule face significant consequences. This includes reimbursing affected consumers and paying hefty civil penalties of up to $50,120 per violation.

The FTC’s efforts, particularly the CARS Rule, are meant to strengthen consumer protections nationwide and provide an additional layer of defense against yo-yo financing scams, especially in states with weaker consumer protection laws. While they don’t override existing state laws, they offer a federal safety net for car buyers.

California’s Protections Against Yo-Yo Financing

Some protections against yo-yo financing in California can be found in the Rees-Levering Motor Vehicle Sales and Finance Act (also referred to as the Automobile Sales Finance Act, ASFA, or California Civil Code § 2981-82). This Act provides consumers entering into conditional sales contracts for motor vehicles with comprehensive protections that go beyond those provided at the Federal Level.

Cali. Civ. Code. § 2981 – Definitions


Cali. Civ. Code. § 2981.9 – Criteria for Conditional Sales Contract Formation – USED BELOW


Cali. Civ. Code. § 2982 – Mandatory Disclosures – USED BELOW


Cali. Civ. Code. § 2982.7 – Refunds – USED BELOW


Cali. Civ. Code. § 2983.7 – Prohibited Provisions


If you’re thinking about buying a car in California, here’s how the state’s laws can safeguard you from yo-yo financing.

  • Must Be in Writing: Conditional sale contracts for motor vehicles entered into in the state of California must be memorialized in writing, in one single document. This document must contain all key provisions of the agreement and must be signed by the buyer. (Cali Civ. Code 2981.9)
  • Full Refund Guaranteed: If the conditional sale contract is not executed for whatever reason, the dealership must refund the buyer any payment he has already made. If the buyer traded in a car as a form of downpayment, the seller must return the car to the buyer. If the dealership is no longer in possession of the car used as a form of downpayment, it must reimburse the buyer either fair market value for the car, or the car’s value as stated in the conditional sale contract, whichever is greater. (Cali. Civ. Code 2982.7)
  • Mandatory Disclosures: If the conditional sale contract does not contain any of the many specific disclosures required by law, the contract is not enforceable. These disclosures are intended to protect consumers from deceptive sales tactics and crafty contracting, and many of them comprehensively break down the final cost the buyer will pay for the vehicle. Each of these disclosures must be clearly labeled within the contract with the header “Itemization of the Amount Financed.” (Cali. Civ. Code   2982)

These protections are a significant advantage. If the dealership tries to pressure you into a new loan with worse terms after the initial financing falls through, you can walk away with your car and a full refund, thanks to California law.

Important Note: While California offers these consumer protections, yo-yo financing itself isn’t explicitly banned in the state. However, these laws make the practice much riskier for dealerships and empower you to fight back if it happens to you.

Tips to Avoid Falling Victim to Yo-Yo Financing

Check for Conditional Terms

  • Review your sales contract for terms like “conditional” or “subject to financing.”
  • These phrases indicate the sale isn’t final until financing is approved.
  • Confirm with the dealer if the sale is conditional and get a written statement.

Watch for Hidden Fees

  • Examine all paperwork for hidden fees or additional charges.
  • Look for add-ons like service contracts, insurance, and accessories.
  • Request a clear breakdown of all fees and ensure they match what was discussed.

Secure Your Own Financing from a Bank or Credit Union

  • Get your own financing before even visiting the dealership. Shop around and make an auto loan request with several institutions to get the best deal.
  • Getting preapproved provides confidence and leverage when negotiating.
  • Compare any dealer financing offers against your preapproved loan to ensure the best deal.
  • If terms change after the sale, rely on your preapproved loan instead.

Review Sales Contracts Closely

  • Scrutinize every aspect of the financing contract.
  • Look for terms like “conditional,” indicating dealer retains ownership until full payment.
  • Ensure agreed-upon terms, including price, interest rate, loan term, and fees, are listed.
  • Verify the trade-in value and down payment are correctly applied.
  • Ask for clarification on any unclear terms or information before signing.

Handling a Yo-Yo Financing Situation

Encountering a situation where the dealer changes or fails to honor the originally promised financing terms could indicate a yo-yo sale scam. Here’s how to handle it:

Identify Red Flags Sudden calls from the dealer claiming that financing fell through and pressuring you to agree to new, less favorable terms are major red flags.

Examine All Paperwork Carefully review the original purchase agreement and any new documents provided by the dealer. Make sure all terms and conditions match what was initially agreed upon.

Request Proof of Denial If the dealer asks you to return the car, request written proof of the lender’s denial of financing. This should include:

  • A denial letter from the financier, confirming that the original financing fell through.

Take Action if Terms Change If the dealership insists on new terms, you have the right to:

  • Walk away from the deal.
  • Return the car if necessary, ensuring you receive a full refund of your down payment, trade-in value, and any fees.

Report the Dealership If the dealer refuses to refund your money after selling your trade-in vehicle, take the following steps:

  • Report the dealership to the Consumer Financial Protection Bureau (CFPB).
  • File a complaint with the Federal Trade Commission (FTC).

Consult a Consumer Attorney Consider consulting a consumer attorney who specializes in fraud. An attorney can help you:

  • Understand your rights.
  • Discuss your legal options and potentially take action against the dealership.

A careful, proactive approach with meticulous attention to detail will allow you to avoid getting caught in a yo-yo financing trap.

The Scope of Yo-Yo Financing in the US

Yo-yo financing is still widespread. NPR recently sent a survey to consumer attorneys who deal with auto cases and received a response from 40 attorneys. Across those 40 there were 900 cases of yo-yo financing during the prior year from the time of the survey. That number barely scratches the surface since there are thousands of consumer attorneys in the US. The impact on victims of yo-yo financing scams can include things like financial strain, loss of transportation, and long-term credit damage.

Closing Thoughts

Vigilance in reviewing all details, and following the above tips when purchasing a vehicle from a dealer can help you avoid falling victim to yo-yo financing scams. If you suspect you’ve been a victim of a yo-yo finance scam, the attorneys at Conn Law PC can help. Give us a call at 877-421-9759 or use our contact form to get a free consultation.

April 30, 2024