This is when the dealer arranges the financing, lets you take the car home, then calls you up several days later informing you the financing fell through and you need to bring the car back.
When you're back at the dealership, they'll ask you to sign a new loan at a higher interest rate and possibly a bigger down payment to qualify for the new terms.
The consumer is left confused because they assumed everything was fine. They had signed the purchase agreement and took the car home - how could this be?
What they didn't realize was the agreement was contingent on the financing being approved.
In the meantime, the car buyer has been driving the car around and showing it off to friends and neighbors. They may have even traded their old car and the dealer has sold that off too!
So now the car buyer is in a really bad spot. At this point, they either have to sign the new terms or return the vehicle.
The dealer knew you would never be approved for the loan and that you'll likely sign the new terms to get it over with. It's easy profit for the dealer.
This scam is pulled mostly on people with bad credit. Dealers know these consumers don't have many options so they take advantage of the situation.
Your first line of defense against this scam is to get your own car financing pre-approved before going to the dealership (Get pre-approved at AutoCreditExpress). You should do this anyway if you want to get the best auto loan terms.
If you have your own financing lined up, you don't have to worry about getting the dreaded "financing fell through" call.
If you do get financing through a dealer (you should only do this if they can beat your best rates), then ask to see the loan approval. You may be told by some dealers that the lender agreement is confidential. This should be a red flag.
If a dealer asks you to sign a "borrowed car agreement" (BCA) along with the purchase agreement, this is almost always because the loan has not been approved. Again, ask to see the loan approval before taking the vehicle home.
Sometimes, there are legitimate reasons why a financing deal may fall through. If you purchase a car after-hours or on the weekend, the loan may not be approved until the following day or until the first business day.
This is rare though since most lenders have fully automated approval systems in place. In most cases, a dealer should know whether you're approved within seconds.
Even if there was an honest mistake and the financing falls through, a reputable dealer should incur the costs since the buyer was not at fault.
But let's assume you got the call from the dealer telling you the financing fell through. Here are your options:
If you negotiated a good price on the vehicle, your best bet is to try to get financing on your own. Don't trust the dealership to get you a new loan - they already proved to be deceitful and are not likely to get you a good loan deal.
If you can't get financing on your own, consider the new rates and decide if it's worth it. If not, you are legally allowed to return the vehicle and get any payments or fees returned back to you.
Consider this a lesson learned and make sure you get pre-approved next time before taking delivery of the vehicle.