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Can you imagine finding the right car at a dealership, getting approved for a car loan, and taking a car home, only to be told you were denied later on? This does happen from time to time. It’s a situation called yo-yo financing, and here is how you can avoid it.

Yo-yo financing is also known as a “spot delivery”

Ford F-150 pickup trucks at a dealership.
Ford F-150 pickup trucks at a dealership. | David Paul Morris/Bloomberg

Yo-yo financing, also known as a “spot delivery,” is when an auto dealership says that you’re approved for a car loan only to have you return later to re-sign for it. It could be over a span of days or even weeks before the dealer calls you to come back. But they’ll usually tell you that the financing for the car “fell through” and that you need to come back and “figure it out.”

According to Cars Direct, “Often, once a consumer returns to the dealership, the car loan they originally applied for (and told they were approved for) is renegotiated. Many times, it means getting a higher rate or monthly payment than what they were originally slated for.”

As you can guess, spot deliveries are illegal in some states, but not all of them. An interview on NPR revealed that there is fine print in the contract that buyers sign with dealers, which states that the contract can be canceled at any time if the dealer has trouble getting financing for the buyers.

Spot deliveries mostly happen to sub-prime borrowers

An electric dealership, where they will not phase out Ev sales.
Hyundai dealership for EV sales | Anindito Mukherjee via Getty Images

Most buyers that experience yo-yo financing have less-than-stellar credit, so it is possible for the dealer to submit the credit application to multiple banks and not get an approval from a majority of them. In some cases, the dealer will get an approval from a sub-prime lender, which will typically ask for more of a down payment or tack on a higher interest rate.

As in the case of Kaitlyn Arland, a customer that purchased a Kia. Arland was told she was approved when she purchased the car, but later received a call stating that she needed to put $2,000 more down to get approved by another lender.

She didn’t have the money, so the dealer took the car back.

How can you avoid yo-yo financing?

If you plan on purchasing a new or used car from a dealership, there are ways to ensure that you don’t fall victim to yo-yo financing. When you’re signing the papers for the car, if the dealer doesn’t show you financing terms and says that they’ll “take care of it, you can take the car now,” that’s a clear sign.

One good way to avoid getting stuck in the yo-yo is to get a pre-approval from an outside lender. Going this route will ensure that you have your financing figured out upfront and that you’re already approved. You will even know the projected interest rate and loan terms beforehand.

Lastly, if you plan to buy a car from a sub-prime dealership with its own financing, you’ll have to be approved before you can even pick out a car. The key is to remain vigilant when purchasing a car and make sure that you have the financing set before you drive the car off the lot.