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Auto Finance: Watch Out for These Dealer Scams

Auto dealers are lobbying furiously to escape the jurisdiction of the new consumer finance protection agency in the financial reform legislation. Dealers' reps claim they already are regulated by state agencies and that the new regulation would tighten credit for consumers. The whole controversy made us wonder: What are they trying to hide from regulators?

If you are about to buy a new or used car, it is a question you should ask and be prepared for. "Car dealers buy and sell money for profit, " says Linda Goldberg, owner of auto brokerage firm CarQ which arranges financing for clients as well as negotiating their car purchases. "Sometimes the financing profit can be three times the dealer's profit from selling the car." But the typical consumer focuses on the car's price and isn't sufficiently skeptical when he goes to the dealer's finance and insurance specialist-generally known as "the F&I guy" (even though some are women).

One of the worst scams broker Linda Goldberg has run across is the so-called "yo-yo finance deal." In this scenario, the customer gets financing through the dealer and believes he has signed a deal for payments of, say, $300 a month. The buyer takes the car home. A week later, the dealership calls and says in order to get financing approved, the payment must be $400 a month. Pay up or the car will be repossessed. (The Pentagon launched an investigation of this tactic among dealers near military bases after becoming concerned that military personnel were being scammed.)

To protect yourself from the yo-yo scam, don't sign any agreement that includes language like "subject to loan approval." Every legitimate loan or lease agreement has an approval number. Ask the dealership for that number.

Here is how to armor yourself against other F&I scams or unnecessary products or services:

Get financing approved in advance. If you have a pre-approved loan elsewhere, the dealer then is motivated to compete against the deal you already have. Check with your bank or credit union or sites such as and to evaluate financing offers.

Know your credit score. In another dealer scam, you're told your credit score is too low for the car company's 0% or low-rate financing when you really could qualify. If your FICO score is 700 or above, you should be eligible for almost any special promotional financing. If you are bring in a printed report of your score, the F&I department cannot play low-score games.

Keep each part of the transaction separate. Dealerships love "payment buyers" who focus only on the monthly payment. That lets the seller wrap all together the trade-in, if any, the price of the new car and financing. But this makes it virtually impossible to see if you're overpaying. Instead, negotiate hard on the new-car price after finding a typical selling price from a web site such as or Then make sure the salesman and finance specialist spell out the trade-in allowance (their value for your trade-in), the new-car loan's interest rate and its term.

Don't buy any add-ons. When the F&I department tries to sell you an extended warranty (for about $1,000 to $3,000), and this almost surely will happen, pass. Many auto brands now automatically include warranties on the power train-the expensive parts such as the engine, transmission and axles-lasting five years or more. That's generally enough coverage.

One-of the latest F&I fee generators is charging you $300 or so to have your Vehicle Identification Number (VIN) etched into one of the car windows as added protection if the car is stolen. You definitely don't need this since it may not work. Thieves savvy enough to erase the original VIN will look for the etched one, too.

The F&I specialist will often say that loan approval depends on the extended warranty or VIN etching. This is almost always a lie. Check the final agreement to make sure no "junk fees" have been added in-profit add-ons that have not even been discussed.

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