Auto Buyers: How to Avoid "Yo-Yo" Financing

NEW YORK (MainStreet) -- Car buyers who take possession of a new vehicle before the financing is complete are at risk of getting blind-sided financially.

Dealers can repossess the vehicle and only offer it back under onerous terms. How can you beat the "yo-yo" syndrome? One major online car trading website has a few answers.

No doubt, consumers are starting to line up to buy cars again, after several years of soft sales.

According to J.D. Power & Associates, new vehicle sales were up 5% in Feb. 2012 compared to the year earlier period.

If you’re heading to your local auto dealer, the online auto-trading firm, advises that you watch out for shady financing deals.

Specifically, Edmunds says to avoid so-called “yo-yo” financing, where a consumer “takes possession of a vehicle before the financing is complete.”

When that happens, the dealer has some serious leverage over the buyer. The dealer can either repossess the car or truck outright, or force the buyer into a corner by demanding a higher interest rate, a larger down payment, or both.

Obviously, the trick up front is to have your financing pre-arranged, so it can’t be renegotiated after you drive off the lot in your new car.

"This phenomenon highlights the benefit of having preapproved financing in place before you go car shopping, especially if you're a subprime car buyer," explains consumer advice editor Carroll Lachnit, in a statement. "You don’t want to be faced with an uncomfortable decision of paying more than you originally agreed to pay, or deal with the embarrassment of forfeiting a vehicle that you might have already showed off to family and friends."

Most yo-yo financing troubles occur when banks and lenders are closed, either after 5 p.m. on weekdays, or on weekends. Buyers fall in love with a new set of wheels, agree to buy the car on what the industry calls a “spot delivery” deal, then wait for the banks to reopen before completing the financing deal.