Spending hours or days negotiating for a vehicle can be a taxing experience, so reaching an agreeable price feels like a big accomplishment for car shoppers. It seems reasonable to let your guard down and relax as you enter the F&I office to finish up the paperwork, but that can lead to a big mistake.
The finance manager or clerk will start going over the paperwork, representing the car as sold and financed while showing you a specific rate. You skim through the mountain of paperwork and quickly sign all of the forms so you can drive off in your new car.
At this point, most people are brimming with excitement — they show off the car to their friends and family and share pictures on social media — but that jubilation can quickly be deflated with a call from the dealer telling you that the financing has fallen through and you don’t own the car after all.
The dealer tells you that the bank refused the loan and that you need to come back and sign a new contract — or maybe give a bigger down payment — in order to keep the car. You drive back to the dealer to argue that you signed a finance contract for a specific rate that was already approved, but they tell you otherwise and pull out a “Conditional Delivery Agreement” from that stack of papers you signed to prove their case.
This type of agreement is also known as a “Spot Delivery” agreement, and is used in cases when a dealer is unable to get immediate approval for a customer.
Spot delivery can be a legitimate tool — it allows dealers to deliver a car when immediate approval is not possible or if there are stipulations that need to be met, but it’s also an easy way to abuse customers with poor or little credit.
Spot delivery agreements were a great tool in the days of faxed credit applications and for off hours sales on nights and weekends, but they’re no longer necessary to keep a dealership efficient and should become a thing of the past. The advent of online services like DealerTrack, CUDL, and RouteOne allow dealers to get an answer to a credit application within minutes and have the deal finished up before the customer leaves the lot.
These online services will approve many customers with good credit but may return a denial or pending answer for customer with bad or no credit. Pending applications can be turned into approved applications if certain stipulations are met, but many times they require a call to a bank that may only operate during standard business hours. Some dealers will make a judgement call and spot the car based on a checklist provided by a lender, then wait for the next business day to call the bank and get final approval.
Legitimate dealers will quickly resolve these pending applications and may ask the buyer to provide a pay stub or other document to prove income and get the deal finished up on their original terms.
Predatory dealers will often present a deal as financed even if they have received denials across the board, just to get the customer into the car. These dealers may offer favorable rates in order to “puppy dog” the customer — i.e., to have them fall in love with the car and agree to less favorable terms at a later time.
Once the car is in the possession of the customer, these dealers will shop the deal around and try to find a lender that will take on the loan. These new deals often end up with subprime lenders and cost the customer much more than initially agreed or require more money down. Once the customer is notified that they need to come back and re-sign the contract, they may threaten to get a lawyer or keep the car without signing a new contract, but the dealer usually wins. They can threaten to repossess the car because the deal was never funded.
The laws for spot delivery contracts vary wildly from state to state, but in many states the dealer can legally repossess the car since they still own it. Predatory dealers count on the fact that many of these buyers will have an emotional attachment to their new car and will sign a new contract at double or triple their initial interest rate just to keep it. Customers unable or unwilling to sign a new contract will often lose their new car to a repo, and could even lose a down payment or trade-in since many of these dealers will charge rental fees (for the time spent with the car) and recovery fees (to bring it back to the lot).
On the flip side, many dealers can get caught up in spot delivery issues if the customer knowingly misrepresents their credit and income. In some cases, customers with bad credit may come in and embellish their credit application in order to get approved. They may state their yearly income as being $50,000, when in reality they may only make $30,000. These cases might also get a pending approval, since they will have a stipulation to prove the higher income.
Savvy finance managers will ask for a pay stub in order to match the income and write a spot delivery to get the customer into the car. If one isn’t available, they’ll have to make a judgement call of how honest the person is and whether to spot them or risk losing them to the next dealership down the road.
If the customer is unable to meet the stipulations and provide proof of income, the deal may require more money down or a co-signer, and can cause many issues for the dealer if the customer is unwilling to cooperate. Trade-ins add another layer of complexity if there is more negative equity involved than the customer initially presented. The deal can get even more complicated for dealers in states with strong consumer protections laws, such as Wisconsin. The law in Wisconsin states that a spot-delivered vehicle must be financed, and, if the dealer is unable to secure funding from an outside lender, they must finance the deal in-house.
The Wisconsin law is a great model to clean up the spot delivery process, but there are risks for all parties involved. The best way to reduce them is not to do a spot delivery at all. Dealers should do their homework and make sure that they have approved financing before a customer leaves the lot, but ultimately it is up to the consumer to protect themselves.
The best way to be informed is to monitor your credit and seek pre-approval for a loan before going to the dealership. Your bank or credit union can give you a firm answer almost instantly and you can be prepared with a rate when you approach the dealer. This allows you to have the upper hand in the finance negotiations and to be sure that your loan can be approved.
The dealer may offer a better rate or incentives for financing through them, and you can take their loan as long as you are sure it isn’t being spotted. You should always make sure that you’re not signing a spot delivery agreement. The easiest way is to just ask the finance manager directly if your deal has been approved and funded.