Auto Loan Financing Denied: What Happens to the Car
Most people finance their cars. What happens if a car is financed and the financing is later denied or rescinded? The keys to keeping the car are why the financing was rescinded and when.
In most cases, the car is usually returned to whatever party holds title...typically the dealer or the auto financing company (they are now often—but are not always—the same company). Unless the buyer can come up with other financing or the money in cash, they will probably have to return the car.
The agreement between the parties is a contract with an attached “security interest.” The vehicle, in other words, is not the buyer's, but the financing company's. Typically, financing is the obligation of the buyer, and they buyer carries all the risks of failed financing. This is why some companies also seek damages (wear and tear on an auto) when receiving the vehicle back.
Under typical contract rules, if one party cannot or does not perform its obligations (getting financing), the other party does not need to perform (selling the car). In this case, just as the buyer would not have to pay if the dealer did not provide the car, so the dealer does not have to provide the car if the buyer can’t or won’t pay in an approved manner. Getting a car is naturally dependent on paying for it—no payment, no car. This set of promises applies when the payment is coming from a third party, in the former of financing.
Exceptions to Usual Rule of Return or Repossession:
There are some specific situations where the buyer might not have to return the vehicle, or could at least sue for damages.
One such case would be if the dealership somehow “guaranteed financing” —perhaps by including enticing advertisements, which the buyer relied on. Examples of this over-exuberant, potentially binding salesmanship, may include saying “everyone gets financing” or “no one turned down.” It is debatable whether a dealership may need to honor a financing commitment in these terms. Usually, courts recognize mere “puffery” by salesman as not binding. To keep the vehicle, the argument would have to be made (and proven in court) that the dealership committed itself to providing financing, and that commitment is itself a contract—i.e. that there was an offer to the buyer to purchase a car with guaranteed financing. So, if the buyer accepted the offer by acting in good faith, such as putting down a deposit, the dealership now needs to provide the financing in some fashion.
In a credit-strapped economy, with dealerships competing for a smaller customer base, many are offering guaranteed financing —though it’s more important than ever for buyers to pay attention to any “small print” or disclaimers. For example, if offer terms require a minimum credit score, buyers whose credit score is below that may not enforce the offer.
A buyer may also be able to keep the vehicle by showing there was fraud or a deceptive trade practice. Fraud is a material misrepresentation (or lie) made to the buyer. The buyer must have relied on this misrepresentation as an inducement to purchase a car.
As an example of possible fraud, consider a salesman who stated “Don’t worry about your credit...just put your money down —we never turn anyone down.” If subsequently there is a turn down, the car buyer may have a cause of action arising out of that possible misrepresentation. If the dealership does this sort of false sale often enough, they may be engaged in a deceptive trade practice: consider contacting your state attorney general. Consider it, but wait until you see if the dealership attempts to charge you for returning the car.
It’s also barely possible (unlikely unless there are other facts on your side), that a court would enforce the salesman’s statement as a contract under one or another legal theory, such as “promissory estoppel”. The problem with this arrangement is the small print, signed before taking the vehicle home, which would almost certainly bar enforcement.
Finally, it sometimes happens that between the time financing is preliminarily arranged, and the car is actually financed, some evidence affecting creditworthiness surfaces. This may also occur after financing, such as through a judicial decree or even an IRS lien. In such rare events of unhappy timing, any court order or tax seizure would very possibly intervene in surrendering possession to the dealership or to the financing agency.
The Bottom Line:
In short, as a general contract matter, under the Uniform Commercial Code (adopted in almost every state), if there’s no payment for whatever reason, there’s no right to keep the car.
It remains remotely possible a dealership or its agents could have made statements that in one way or another would force it to provide financing and sell the car. More likely, the best deal in a collapsed financing situation is for all parties to cut their losses, recognizing both may have legal exposure and risks, and return the vehicle without any charges to the would-be buyer.