Consumers with less than perfect credit are far more likely to be the targets of yo-yo financing scamsWhat We Know About Yo Yo Financing
Here at Auto Credit Express weve spent the past two decades helping consumers with bad credit find dealers that are experts in a broad range of credit situations. In most instances, these dealers can offer credit-challenged car buyers their best opportunities to receive an approval for an auto loan.
These dealers offer loans only after examining each buyers credit profile including credit score, income, monthly expenditures, job and residence stability as well as payment to income and debt to income ratios.
But there are a few dealers (none we work with) that attempt to shortcut the buying process by using a lending scam called yo-yo financing.Yo-Yo Financing
In a typical yo-yo transaction buyers sign a conditional sales agreement. The word conditional refers to the fact that the terms of the contract - down payment, interest rate and loan term - have not yet been approved by a lender.
If the buyer has poor credit (which is the case much of the time) and the dealer cant find a lender willing to approve the deal as written, the dealer then notifies the buyer that in order to keep their vehicle, theyll have to come in and sign another sales contract. In most cases the new contract will have a higher interest rate, a higher down payment, or both.
According to one survey sponsored by the Center for Responsible Lending, borrowers who signed a new contract as a result of this type of bait-and-switch financing ended up with interest rates that, on average, were 5 percentage points higher than the original rate they were quoted.How to Avoid the Yo-Yo Scam
Here are some tips to help buyers avoid a yo-yo scam:
- Never drive a vehicle home until financing is approved
- Insist on being given a signed copy of the finance contract (by both the borrower and dealer) before taking the vehicle home
- Never sign a finance contract that hasnt been filled out
- Never sign a conditional contract or a conditional delivery form
Finally, buyers should remember the golden rule of car finance: if the deal looks too good to be true (as far as the interest rate and down payment), it is.The Bottom Line
Car buyers, especially those with questionable credit, are particularly susceptible to yo-yo financing schemes in which a dealer will sign them to a conditional contract and, once theyve taken possession of a vehicle, call them back to re-sign another contract with less favorable terms.
One more thing: Auto Credit Express believes car buyers should have access to bad credit auto financing without having to worry about schemes like yo-yo financing. That why we match applicants with credit difficulties to car dealers that can offer them their best opportunities for auto loan approvals.
So if youre ready to reestablish your car credit, you can begin now by filling out our online car loan application.
DETROIT, Oct. 8, 2014 /PRNewswire/ -- Ally Financial has been honored with a 2014 Auto Finance Excellence Award, which recognizes achievement and contribution to the automotive finance industry. The award was presented yesterday at the annual Auto Finance Summit by Auto Finance News.
Ally was cited for its emergence as an industry leader in helping dealers understand the growing importance of social media. Allys social media channels provide timely information and allow dealers to leverage meaningful content to support sales and demystify the product set for their customers. This unique content and expert insight is posted throughout the week on the Ally Auto Facebook, Twitter, Google+ pages and the Ally Auto Roadmap blog.
We applaud Ally Financials continued commitment to excellence in the auto finance industry, said JJ Hornblass, president and CEO of Royal Media Group, publisher of Auto Finance News. The Auto Finance Excellence Awards are a mark of distinction for companies and individuals that stand out among their peers and we congratulate Ally on this recognition.
Social media represents a new way of communicating with car buyers and a new way of doing business, said Andrea Riley, chief marketing officer, Dealer Financial Services at Ally. Ally is committed to providing dealers innovative tools to succeed in an ever-evolving industry, and we are honored to receive this award.
Ally has been a leading provider of auto financing for more than 90 years and currently has more than 16,000 dealer relationships and services approximately 4 million retail auto accounts.
About Ally Financial Inc.
Ally Financial Inc. is a leading automotive financial services company powered by a top direct banking franchise. Allys automotive services business offers a full suite of financing products and services, including new and used vehicle inventory and consumer financing, leasing, inventory insurance, commercial loans and vehicle remarketing services. Ally Bank, the companys direct banking subsidiary and member FDIC, offers an array of deposit products, including certificates of deposit, savings accounts, money market accounts, IRA deposit products and interest checking. Allys Corporate Finance unit provides financing to middle-market companies across a broad range of industries.
With approximately $149.9 billion in assets as of June 30, 2014, Ally operates as a financial holding company. For more information, visit the Ally media site at http://media.ally.com or follow Ally on Twitter: @Ally.
SOURCE Ally Financial
The Consumer Financial Protection Bureau (CFPB or
the Bureau) recently announced its plans to subject
many nonbank automobile financing companies to its supervisory
authority. The CFPB#39;s proposal signals heightened scrutiny of
the marketing, credit reporting, and debt collection practices of
auto finance companies, in addition to the Bureau#39;s ongoing
focus on pricing practices and equal access to credit.
Under the Dodd-Frank Act, the CFPB is able to define certain nonbank markets and the larger participants in those markets for purposes of defining the scope of the Bureau#39;s supervisory jurisdiction. The Bureau#39;s supervisory jurisdiction allows it to examine an entityakin to an auditfor compliance with the consumer finance laws the Bureau is responsible for enforcing, including the Bureau#39;s prohibitions against unfair, deceptive, and abusive acts and practices (UDAAP), as well as the 18 enumerated consumer laws the Bureau enforces.
Below is a brief summary of the proposed rulemaking.
- Definition of Auto Finance Market - The proposed rulemaking defines the auto financing market to include companies engaged in one or more of the following activities: granting credit for the purpose of purchasing an automobile; refinancing existing credit obligations or previously refinanced credit obligations that had been made for the purchase of an automobile; purchasing or acquiring such credit obligations (including refinancings); providing automobile leases; and purchasing or acquiring automobile lease agreements.
- Scope of Auto Finance Market - The proposed rule sets forth a threshold test to determine if an auto finance company is a larger participant under the rule. Specifically, the test provides that a nonbank covered person would be a larger participant if it has at least 10,000 aggregate annual originations and is engaged in one of the activities listed above. The CFPB estimates this is approximately 38 companies.
- Nonbank Financing Targeted - Nonbank auto finance companies eligible for inclusion in the larger participant category under the proposed rule include (1) specialty finance companies, (2) captive nonbanks, and (3) buy here pay here (BHPH) finance companies. The Bureau#39;s proposed rulemaking explains, ...specialty financing companies serve consumers in specialized markets. Many of these companies focus on providing financing to subprime borrowers who tend to have past credit problems, lower income, or limited credit histories, which prevent them from being able to obtain financing elsewhere.
In announcing this proposed rule, the Bureau also notes the following:
- The companies defined as larger participants in the proposed rulemaking originated approximately 90% of nonbank auto loans and leases. In 2013, these companies provided financing to an estimated 6.8 million consumers.
- The Bureau also warns that in the auto finance market, it is especially concerned with the marketing of auto loans, the furnishing of accurate consumer information to credit reporting agencies, and the fair collection of debts.
- The Bureau simultaneously released a summary of its Supervisory Highlights (Summer 2014) addressing its fair lending supervisory findings in the indirect auto lending market (supervised banks that finance auto loans). Specifically, the summary notes that the Bureau has found disparities in the pricing of loans based on race and/or the ethnic background of a consumer. The Supervisory Highlights report also notes the key components of a compliance system that effectively identifies and responds to the requirements of the fair lending laws.
There is a sixty-day notice and comment period for this rulemaking from the date of publication in Federal Register. The proposed rulemaking is available here.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
In response to what it sees as a troubling trend of auto-lending discrimination at banks, the Consumer Financial Protection Bureau is proposing to oversee the business practices of nonbank consumer auto lenders - including automakers' financing units in the same manner that it does the nation's banks.
Reactions have been swift and searing.
The National Automobile Dealers Association publicized a plea for the bureau to accept the industry's revised approach to preventing predatory lending practices in place of the bureau's proposed course of action.
Congressional supporters have also weighed in with their strong views, some because their interests are aligned with the auto and finance industries. Others, I suppose, have joined the argument because this new conflict serves as a proxy for the ongoing debate about the CFPB itself, which they've opposed from the get-go.The Business of Auto Financing
At roughly $900 billion, auto financing is the third largest form of consumer debt in the US Without it, vehicle sales would grind to a halt because at just under $30,000 per unit, the average price of a new car is beyond the ability of most consumers to fund with cash-on-hand.
Buying on time has become an economic way of life for budget-conscious households. It's been a godsend for sellers, too, not least because instead of having to defend against an objection to price, marketers of big-ticket items are able to sidestep the problem by pitching the comparative affordability of a monthly payment plan. But even that's not their only reason for offering credit as an option.
Sellers of durable goods (items that have a long life-cycle and are bought infrequently, like household appliances or cars) often manage three areas of profitability for every sale they make: from the product itself, the service it's likely to require over time and via the financing their customers typically require. At issue, however, is the interplay between these three profit margins--in particular, the extent to which a seemingly cut-rate car price is being subsidized by an unfairly priced financing arrangement--that is attracting the CFPB's scrutiny. Here's how that can happen.
Suppose a car dealer sets its target at a 10% profit margin for every sale it makes. Also suppose that it's only able to squeeze out $1,500 worth of profit from the $25,000 sale it's about to close. Since the profit target for that sale is $2,500, the $1,000 shortfall would have to be made up some other way: through the dealership's service department or by a financing deal.Auto Loan RatesLooking to buy a new or used car or refinance an existing auto loan? Take a look at todays auto loan rates to find the best loan for you.
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After-market service is a crapshoot, though. Who's to say that the buyer will follow the recommended maintenance schedule, let alone have that work done at the dealer's shop? Financing is, by contrast, a much surer bet given that more than 80% of all auto sales are made possible with OPM (other peoples money). The key, however, is to find a way to inflate the financing deal by an additional $1,000.
Fortunately, the banks have been quite accommodating in this regard.
The financial institutions that fund these deals typically quote "buy rates" or "base rates" to their car dealer and nonbank cohorts, which they permit to be marked up as they see fit.
So continuing with our $25,000-purchase example, suppose the customer consents to a $5,000 down payment--which would be typical for a loan of this type--and requires a five-year repayment term for the $20,000 balance. Let's also suppose that the bank has set a 5% buy rate for the deal.
Since the dealership wants to earn an additional $1,000 from the sale, and since that sum represents 5% of the value of the prospective loan, the dealer would then divide that 5% by the so-called half-life of the financing term--2.5 years, in this instance--and add the resultant 2% to the base rate. Consequently, the customer would be charged 7% for his loan rather than the 5% rate the bank has approved.
Incidentally, the longer the term, the lower the interest rate mark-up: If the aforementioned example were for a three-year loan instead of five, the mark-up works out to be 3.33% instead of 2%. Also note that all this math works in reverse when car dealer and manufacturers want to kick-start sales with offers of seemingly below-market-rate financing.How Consumers Can Comparison-Shop
Clearly, the temptation exists to make even more money by way of this pecuniary prestidigitation--and that goes to the heart of the CFPB's concern, particularly since its investigations have shown that those who can least afford the cost of borrowing are charged the most. But though the bureau has successfully enforced regulatory compliance and extracted tens of millions of dollars' worth of fines in the process, the financial-services industry has thus far adamantly refused to curtail its long-standing policy of permitting intermediaries to mark up base rates.
So while this regulatory contest of wills presses forward, what can consumers do to ensure that the deals they make are fairly priced? By separating the profit centers and testing the pricing for each.
As important as financing is for big-ticket purchases, a good strategy would be to negotiate the sale price of the item as if you were paying cash for it. That way, you'll be able to compare the quote you receive with the price that sites such as Consumerreports.org suggest you should be willing to pay for the car you have in mind.
Then test the dealer's financing offer by comparing that with the local alternatives you can find online. Be sure to take both rates and fees into consideration when you compare costs.
For example, the APR for a five-year loan for $20,000 that charges 5% interest plus a $250 documentation fee is actually 5.51%. Efunda.com has an especially easy-to-use online calculator that can help you with the math--not only for car loans, but also for any other type of financing where interest rates and fees are individually quoted.
One more thing: Consumers can certainly benefit from knowing ahead of time what condition their credit is in their credit score will, to a large extent, inform what kind of interest rate they can expect when they borrow money. They can see their credit reports for free through AnnualCreditReport.com, and can get their credit scores for free through Credit.com.More on Auto Loans:
- Are There Car Loans for People With Bad Credit?
- What to Do If You Cant Make Your Car Payments
- Top 5 Worst Car Buying Mistakes
This story is an Op/Ed contribution to Credit.com and does not necessarily represent the views of the company or its partners.
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