Can a Dealer Take Back a Car After Papers Are Signed? Is it Legal?
The short answer to the above questions are Yes and Yes.
It’s a fairly common situation.
You buy a car from a dealer who arranges a loan, you sign the papers, possibly make a down payment and/or trade an old vehicle, and you drive away — thinking the deal is done.
You may have received the impression from the dealer that your loan was approved, which is presumably why you were allowed to drive away in your new car.
However, most dealers don’t provide or approve loans (except for buy-here-pay-here used car dealers). They use outside banks or finance companies. One of the papers you signed was a loan application, not a loan approval or grant.
Another paper you signed essentially says that the car sale is contingent on the dealer being able to find and secure an approval for your loan with one of his outside banks or finance companies. It’s not final until the loan is approved and the dealer has been paid for his car by the lender.
How it works
If a dealer feels there’s a good chance that he can find a lender who will approve your loan application, at the original terms, he will allow you to take his car and drive it home.
After you’ve driven away, the dealer will forward your application to one or more of the lenders he works with. If you have excellent credit, a good steady income, and no excessive debts, there will be no problem and he’ll receive an approval right away.
However, if you have poor credit or income/debt issues, and the dealer can’t get you approved with one of his lenders under the original terms of the deal, he will either ask you to sign another deal — almost always at higher interest rate or larger down payment — or return his car.
This is always a shock to customers who have been driving the car, falling in love with it, showing it off to family and friends — and then discovering that the purchase deal has fallen apart.
It can be days or weeks later, after the dealer has tried several different lenders, that the customer gets notified of the shocking news. It might result in anger, disbelief, and confusion, all at the same time. It seems that it might be illegal or a scam.
What to do?
If the dealer offers different terms and asks you to sign a new contract, presumably with a higher interest rate and/or larger down payment, you have the option of accepting it, or returning the car.
If the dealer was unable to find a lender to approve you under any terms, and asks for his car back, you should immediately try to get your own financing at a bank or credit union first — or at a reputable online loan provider who specializes in approving people who have poor credit, such as Auto Credit Express.
In this case, you can try to get a loan co-signer, someone who has better credit and income, and is willing to agree to take over your car payments if you fail to do so. They should be aware that being a co-signer means their credit is also affected if they are unable to pay. And they should realize that a co-signer is not a co-buyer, which means that even if they pay for the car, it’s legally still yours, not theirs.
What happens next?
If all else fails, you’ll have to return the car. Some people in this situation believe they have legal rights to somehow keep the car even though there is no loan and the dealer hasn’t been paid for it. They would be wrong.
If you made a down payment to the dealer, he should return that money to you promptly. However, if you have had the car for a significant amount of time, the dealer may withhold some or all of the money as a “rent” charge for the time you’ve been driving the car. It’s legal and common practice.
Another potential problem is if you traded a vehicle as part of the original deal. If the deal falls apart, the dealer is obligated to return your trade vehicle to you. However, if some time has elapsed, he might have already sold it from his used car lot. It’s gone and can’t be recovered. In this case, the dealer is required to give you a check for the amount of the trade value of the vehicle, not his sale price.
Before going car shopping, you should always know where you stand with your credit. If you have poor credit, don’t accept a car dealer’s offer to let you drive your car home until you hear back that your loan application has definitely been approved. What’s your FICO score? Find out now when you check your credit report for $1 at Experian.com!