First off, it is not uncommon for a dealership to let you take a car home while a loan is pending approval. This is known as spot delivery or conditional financing, and it is a sales tactic used to insure that you do not lose interest while the bank is making its final decision. Unfortunately, there are bound to be instances when the dealer is unable to secure the auto loan approval they anticipated. Basically, the financing falls through.
Is Conditional Financing a Scam?
Over the years, there has been a lot of argument between dealers, consumers, and government regulators over this subject. Some dealers insist that spot delivery is crucial to their business, given how many people opt for financing and how long approvals can take, while many consumer advocates have termed the practice “yo yo financing.”
What Can Happen
When you buy a car, but the loan is not approved, there are several things that can happen. The first is that the dealership will shop your loan around some more, or you can do that on your own. In either case, you must be prepared to pay a higher rate than you initially anticipated. The second is that you walk away from the deal. If you are dealing with a reputable dealership, walking away from the deal should be simple, but you may need to check your state laws. Hopefully you can go back, turn in the vehicle and drive off in your trade if you had one. Unfortunately, issues can arise if your trade has been sold (unlikely), or the dealer charges you a fee or tries to keep some part of your down payment.
Arming Yourself with Knowledge
First off, stay calm. You do not want to be like the buyer described in this Edmunds article who leapt across the finance manager’s desk. In such scenarios, you need to know your rights. Since these vary from state to state, we can’t generalize for you. Your best bet is to search with the keywords “spot delivery [state].” Typically, a result such as this article from the Georgia Governor’s Office of Consumer Protection will come up, giving you the information you need. In an extreme case, if you stand to lose several hundred dollars or more, it may be time to contact an attorney well-versed in this area.
The first option you have is to contact the lenders that denied you. You will want to ask why. Maybe it is a matter of needing a higher down payment or they think you cannot afford the payment on such an expensive vehicle. Both can be dealt with by looking at another vehicle. If it is a matter of your credit history, you still have options available to you.
If it is a matter of your credit history, you can look to the internet. You have two main venues to pursue. The first is peer-to-peer lending. With P2P, you are applying for a loan and the application is sent to several lenders or individual investors. These loans come with all of the usual expectations, as we discussed in our piece on financing car auction purchases. There will be an interest rate and monthly payments. Your credit report will be pulled. The loan will be reported to all of the major credit agencies and a failure to pay will result in a repossession, legal action, and a negative entry on your credit report.
Your second option is to look to an online service such as ours. Many of the lenders and dealers in our network operate with the sole purpose of offering bad credit car loans, no credit car loans, and other non-traditional loans. They often offer loans to people with a heavy debt load, low down payment, or on vehicles with a high loan to value ratio. In return, they charge a higher interest rate and often require that the loan be paid back in a relatively short time.
Even if you decide to pursue one of the options listed above, you need to stay in contact with the dealership. You may want to return the car and pick up any trade-in you had, just in case.