Everything you ever wanted to know about the "Deferred Down Payment Scam" but didn't know who to ask. Also known as the "DIP Note Scam," this deceptive dealer tactic can put you in a financial hardship real quick right at the beginning of your car loan.
Dealers use the deferred down payment process to get car buyers to put more money down when buying a new or used car than they where expecting to put down towards the purchase of a vehicle.
Normally they do this by dangling an additional offer in front of the customer whom doesn't have the extra funds available at time of purchase. The customer is led to believe they will get a better deal if they come up with an additional amount of money down.
The Deferred Down Payment Scam Explained
The deferred down payment scam is another technique used in many new and used car dealerships. This scam is used a lot in buy here pay here dealerships and is commonly used on people who have less than perfect credit history.
In the car dealership world, deferred down payments are treated like "NO BIG DEAL." The technique is used when a customer does not have all the funds available to pay the entire down payment up front at the time of purchasing a vehicle.
Never let a dealer talk you into putting more money down than you can afford!
A dealer will let the customer make payments to the dealer for the remaining balance of the required down payment. These payments are called deferred down payments or DIP notes.
This situation becomes a scam when car dealer doesn't add the itemized information such as the date the checks are due or the balance of payments into the contract. Thus creates obligations that aren't included in the purchase agreement or in the single document.
How the Deferred Down Payment Scam Works
You go out and find a nice new car you'd like to buy. You negotiate the price and the dealer tells you if you put $3,500.00 down your payment will be right where you want it to be. Only problem is you only have $2,000.00 to put down. You tell the car salesman you don't have that much money and will just have to wait to buy the car, so you can save up some more money.
The salesman is going to do or say whatever it takes to sell you a car NOW. He says to you, "No problem, I can help you out. We can take a "hold check" for the remaining balance." The car salesman will then discuss with you a payment plan on how you will pay the remaining $1,500 balance.
You decide to write three checks for $500 a piece over the next three months. The dealer has you sign a "hold check agreement" for each check allowing the dealer to deposit the checks on the dates you've both agreed upon.
What is a Hold Check Agreement
A hold check agreement is a form that states the agreed upon date the check they're holding for you will be deposited on. It will also include the amount to be deposited and any provisions regarding returned check fees that may be incurred.
The hold check agreement will then be signed and dated by the car dealer and the person whose name is on the check. Rather than disclosing deferred down payments as required, hold check agreements create obligations that aren't included in the single document or purchase agreement.
Even though most car dealerships will run hold checks through a company like TeleCheck before accepting them as a form of payment. Some hold check agreements have a section on them where you must add a credit card number in case the check doesn't clear. A car dealer will not hesitate to deposit your check or run your credit card on the agreed upon date if the money is in the account or not.
Before Committing to a Deferred Down Payment
Get a pre-approved auto loan though an outside finance source such as a bank, credit union or for the best rates use an online auto loan company. Online auto finance companies don't have the overhead most banks and credit unions have.
You can contact these companies and request free, no-obligation interest rate quotes sent right to your computer. You can then use these quotes as leverage when negotiating interest rates with a dealership.
Another option is finding a different car to buy. Before committing to a large down payment that you don't have readily available, check out some other vehicles available with the same features and benefits. I recommend using online automotive research sites such as CarClearanceDeals and Edmunds. These sites also give you the option to request free, no-obligation price quotes once you pick a vehicle you're interested in.
Can a Deferred Down Payment Hurt You?
It's funny how many of us humans will succumb to the pressure and do whatever it takes when we must have something right away. Car dealers and their salesman understand these emotions and know how to use them to their advantage. If you're not careful and stay focused, agreeing to write hold checks to a car dealer can hurt you financially.
Using the above example of writing three checks for $500 to be deposited over the next three months has created an unexpected and unbudgeted debt load on yourself over the next few months. This is not the time to say, "I'll worry about it later." You'll be in a worse position if the repo man comes to get your car after only owning it for two months.
Not only do you have to pay the dealer $500 a month for the next three months. You also have to pay your newly acquired car payment, car insurance, and your normal every day bills.
How to Avoid the Deferred Down Payment Scam
The easiest way to avoid the deferred down payment scam is to not buy a new or used car until you have the full down payment. If you can't afford a down payment of at least 15 - 20% you should at least put down an amount equal to the tax, title and registration fees. These are just additional fees, when financed, you'll pay interest on over the life of the loan.
"If you can't afford the down payment, you can't afford the car."
Although we don't recommend it, if you have a strong credit history and excellent credit score, you can buy a car with $0 down. You should always be aware of what is on your credit report and know your score before applying for any kind of credit or loan.
You don't want the company you're applying with to know more about your credit history than you do, this will put you at a serious disadvantage.
Never negotiate to buy a vehicle based on monthly payments or down payment alone. If you negotiate in this fashion you're sure to pay too much when buying your next new or used car.
I've always recommended putting at least a 15 to 20% down when buying a new or used car. This puts you in great shape when it comes to saving on finance charges, bank fees, financing for shorter terms and keeping you from being in an upside down position in your vehicle when it comes time to trade the vehicle in.
Further Protection from the Down Payment Scam
- Only use car dealership financing options as a last resort.
- Get pre-approved through your bank, credit union or use online auto finance services for the best rates.
- Carefully read and understand everything you sign.
- DO NOT let a car dealer or salesperson talk you into putting down more money than you can comfortably afford.
- Get free, no-obligation new car price quotes before contacting a dealership. Once you have a guaranteed price you can budget your own money down and payments.
- Never give car dealerships cash or a check as your down payment you may have to fight to get it back. Only use a credit card, credit cards can be disputed.
- Figure the car dealer's true cost and calculate a fair profit offer on any new car you want to buy before visiting a dealership.
Educate yourself on more common car dealer scams.
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