The purchase of an automobile is one of the major financial decisions you'll make in your life. And if you're a reader of this site, it's probably one of the major decisions you make in your life, period. Unfortunately, unscrupulous car dealers are waiting to prey on ambitious consumers. The most insidious way this happens is through a process called "dehorsing" in which a customer loses both their new and used vehicle. And it's not illegal.
How Dehorsing Works
Dehorsing exists because of a gray area in the law that allows a dealer to give you a car based on the assumption of financing (this is referred to as a bailment agreement, though you'll never see that mentioned in an actual sales document). The consumer trades in his or her car and drives out with a new one. Days or weeks later the dealer demands the car back because they couldn't secure financing or secured financing that was outrageous. The consumer tries to get the old car but the dealers insists the car has already been sold (often it isn't).
This is most likely to happen with people who have bad credit or no credit, according to Barbara McGinity with the Better Business Bureau Education Foundation. And while it happens more often with smaller independent dealers, there are a few of the larger dealership companies that are notorious for this practice.
A Hypothetical Situation
Let's assume that you're a twenty-something recent college graduate who rents an apartment, has no credit cards and therefore has little credit. After diligently comparing models and going on dozens of test drives you decide your ideal car is a new Ford Mustang V6 GT. You've called every dealer and found one in the color you want, with the options you want for just $23,000.
When you show up to the dealership you can't resist being shown a a brand new V8 Mustang. After taking it for a spin and talking with the salesman he says you're a great kid and he wants to give you a deal: just $25,000 for the V8 GT Premium. You're floored. Even better, he says you can trade in your old junker Probe (for $2,000) and drive out with the your cherry Mustang today while they work out the financing.
The next month is great. You meet someone nice and take them for long drives in the countryside. So it's a bit of a shock when a month later the salesman calls you and says that because of your lack-of-credit you're going to have an interest rate of 15%. The maximum interest rate in many states is tied to the prime rate, with a certain amount over that and could thus be as high as 24%. Check local usury laws to determine what the maximum rate is.
This means that to pay for your $23,000 Mustang GT you'll have to fork over $547 per month for 60 months for a grand total of $32,820. However you do the math, at 15% you're going to have high payments or pay forever. You decide to return the car rather than be the dealership's bitch forever and find out that your old junker probe is gone. This means that you no longer have a car. You have just been de-horsed.
Is Dehorsing Illegal?
There are few, if any laws that exist to specifically protect against this kind of scam. There are existing laws that you may be able to sue under (see this case here), but if it gets to that point you're looking at the possibility of considerable time, effort and money being poured into getting your vehicle back.
You can also contact your state's attorney general or a local chapter of the Better Business Bureau, but they may be limited in what they can do if there were no laws broken or if the company isn't a BBB member.
How to Avoid Getting Screwed
1. The best offense is a good defense in this case. The most important thing you can do to avoid getting dehorsed is to not take possession of a car until the financing is settled, this is especially the case if you're worried at all about the terms you could get.
2. Check the company out. Do they have a bad record? Are they these guys? The best way to check is to go to the BBB website and find out if they have a history of complaints that are unresolved. Almost every business will have complaints, but a good business will try and resolve the issue.
3. Work out the financing ahead of time. If at all possible, you have the most leverage when buying a car when you have the financing worked out in advance. Also, your bank or your credit union will often have the best financing options if you're worried about it.
4. Don't give them your car. Don't even consider the trade-in until you've worked out all the other parts of the deal unless you have a personal relationship with the dealer. Unless someone is really looking to move cars (which they might be), you'll almost always get the better deal selling the car yourself.
When it comes to dehorsing, there are no victims just volunteers. In the end, many victims of fraud look back and see opportunities where they could have avoided getting screwed.