What is a yo-yo scam and How to avoid it?

Getting financing through an agency is often the quickest and easiest option for many people. According to data from the National Automotive Dealers Association, about 70 percent of buyers choose to finance the sale. You go to the lot, choose the car you want, finance it, and drive home — all on the same day.

Unless there is a document in your purchase agreement that states that financing is not final. In most cases, it won't mean much. The agent will finalize your financing with one of the lenders in their network under the terms you agreed to during your visit.

This process is known as instant financing. This is a common method used by dealers to get you to buy a car. But for less legitimate lenders, it can be used to manipulate the buyer through a "you-you" financing scheme. A merchant who did not intend to give you the APR offered to you may claim that the financing has been forfeited. And you'll be hard-armed to accept a worse price or return the car, sometimes after a trade-in deal has been sold.

What is Yo-Yo Scam?

A Yo-Yo scheme is when you get agency funding. The salesperson may offer you an auto loan at a very low interest rate, a large amount of trade-in or other terms that are hard to refuse. It often seems too good to be true - because it is.

You'll be asked to sign the documents at the low price listed, but after a few days or weeks, the dealer will call you and say they can't offer you the terms of your original deal. The claim is that you need to renegotiate or the entire offer will be cancelled.

The new interest rate is usually much higher than the original loan. When you ask about the rate increase, the dealer will likely say you don't qualify for the introductory interest rate, even though they're actually trying to assure you that you did.

This back and forth is where the name of the scam comes from. I let go of the car, then pulled back like a yo-yo.

Is Yo-Yo funding illegal?

According to NPR statistics, attorneys reported 900 cases last year in which customers believed they were victims of Yo-Yo financing.

Yo-Yo financing is often referred to as a scam. But while the FTC has long considered it a widespread problem, there is no federal law or rule that explicitly prohibits it at present. However, there has recently been a push to regulate instant financing to curb Yo-Yo financing scam - and some want to ban instant financing altogether.

A handful of countries have enacted laws to deal with it.

For example, in California, car dealers are allowed to cancel the sale within 10 days and require you to return the vehicle, but they are not allowed to require you to sign a new contract for the same vehicle.

Meanwhile, Maryland requires merchants to make several disclosures in writing when prompt delivery is permitted. The dealer has only four days to notify you if the terms of the credit are declined, and once the vehicle is returned, they must return the exchanged vehicle, pay taxes and fees.

Check your state's laws to see what restrictions your state has on instant funding. If you believe an agency has broken the law, contact your state attorney general.

How to avoid Yo-Yo financing scams

Knowing what Yo-Yo financing entails will assist you in avoiding it. As with any major purchase, be prepared and read all of the documents in the loan agreement before you sign.

Shop first. You don't have to rely on merchant financing. You can and should compare auto loans before you set foot in the dealership. Not only will this give you an idea of what rates you might qualify for, but you can also avoid merchant financing altogether if they don't offer you better terms.

Read the fine print. Even if you think you have a good understanding of what the potential costs will be in a financing contract, read the fine print. Look up terms like "cop" and ask what they mean if you don't quite understand the context. If you are offered a higher price or value than the original quote, ask why.

Don't sign until you're ready. Car financing at the dealership can add pressure from the sales force. If the salesperson pressures you to sign or accept unclear terms, be prepared to walk away.

In the end, instant financing is not illegal and it is very common. Your loan agreement will likely include language stating that financing is conditional on approval. Check customer reviews and other common scams to determine if the merchant can be trusted.

What to do if you become a victim of a yo-yo scam

There are some quick steps you can take when an agent tells you your financing has been declined.

Review the purchase agreement

Check if the contract is a conditional sale contract. If so, you can return the car and receive a replacement deposit, if applicable.

If the merchant has already sold your replacement, you should receive the sale cash. If the merchant refuses a refund, you should contact your state attorney general's office immediately -- and possibly report the merchant to the Consumer Financial Protection Bureau (CFPB).

Request a denial letter

Ask for a letter from the lender denying your auto loan application. If the dealership doesn't offer it, you should probably return the car and find a legitimate dealer willing to work with you.

See if you can secure your financing

If you reasonably want to keep the vehicle, ask the lender for an out-of-the-door rate. From there, you can look into securing your financing through an online lender, bank or credit union.

How to report a scam

You can report suspected yo-yo car loan scams to the Federal Trade Commission online or by phone. When reporting, you will need to provide personal information to help the authorities identify you. You can also contact your state's attorney general's office for further assistance.

Online

To get started, visit the FTC's online complaint form at reportfraud.ftc.gov. You will need to provide more information about the scam, including the name of the agent and the names of people you have spoken with.

Once you have submitted a complaint, it will be reviewed and assigned to an investigator who will review your case and possibly contact you to request further information.

Phone

You can also contact the FTC by phone at 877-382-4357. The call will go to the Federal Trade Commission's Consumer Response Center, where you will use the phone tree to submit your complaint.

Bottom Line

While instant financing is common, Yo-Yo financing scams are rare. Your best defense is to get a loan before going to the dealership and to thoroughly review any contract you sign.

If you believe you have been the victim of a year-to-date financing scam, contact your state attorney general's office and the Federal Trade Commission.