Home » Articles » Titles » What Is A Bailment Agreement & Should You Sign One?
There is a tactic that some car dealers have been using for a long time, which we observed as far back as 30 to 40 years ago. Recently, it has been featured in the news quite frequently. This tactic is referred to as a bailment agreement, although some people call it yo-yo, be back, or come back. Essentially, it is a way for dealers to engage in underhanded activities that could jeopardize your purchase.
Here’s how it works: When you purchase a car and drive off the lot, the dealer may have the option to call you back and coerce or blackmail you into giving them more money. Even though you’ve already bought the car, they can make you return with more cash, raise your car payments, or even exchange it for a different vehicle. This may seem implausible since you have already driven off with the car, but it is a common practice that can occur without you even realizing it.
We are bringing this up now because Jalopnik recently published an informative article on the topic, and even high-profile YouTuber and attorney Steve Lehto discusses it as one of the dealers’ worst tactics under fire. In fact, his first video on his channel was about this tactic many years ago. While it was out of favor for a while, it is now being used more frequently.
When you purchase a car from a dealership, you are required to sign various documents, such as a buyer’s order, a bill of sale, an odometer statement, and a car loan if you have one. Once you sign all the paperwork, you are allowed to leave the dealership with the car.
Dealerships often use a financing strategy called “spot delivery” or “on-the-spot delivery.” This means that they want to get you in the car and out the door as quickly as possible. They do not want you to go home and consider the purchase because you may change your mind. Therefore, they aim to complete the entire transaction on the spot.
To achieve this, they will take your financing application and submit it to one or more lenders. They will try to find a lender that offers the most advantageous financing for you, but they may also consider the lender that offers the best commission or kickback for them. However, not everyone is approved for financing.
If you are not approved for financing after you leave the dealership with the car, you are required to return the vehicle. This is a legitimate practice to protect the dealership’s interests.
One of the documents that you sign when buying a car from a dealership is a bailment agreement. This agreement stipulates that if your financing is not approved, you must return the car immediately upon request, and the dealership will refund your money and trading back, effectively undoing the transaction. While this is a legitimate and fair practice, it is worth considering whether you should sign such an agreement.
When you apply for financing, the dealership sends your application to various lenders. They assess your credit score, income, and other factors to determine the best financing option for you. However, there is always a possibility that the lender may not approve the financing as expected. For instance, they may approve you for a higher rate or a lower amount of money than what the dealership anticipated.
In such cases, the dealership may ask you to return to the dealership and put more money down or sign up for a higher payment. This may not seem fair, but the bailment agreement that you signed allows them to do so. In some cases, you may have to return the car or switch to a lower-priced vehicle if you are not approved for financing.
Dealerships include bailment agreements in every spot delivery deal. However, there are ways to avoid this.
To avoid signing a bailment agreement, wait until the dealership secures financing before taking possession of the car. If you are in the dealership and they negotiate the terms and financing, do not agree to anything until they have the financing approved and structured as they have proposed.
Instead, ask them to contact you once the financing is ready. It usually takes no more than a day or two. You may leave a deposit to hold the car if you wish, but this poses little risk.
Even if you do not anticipate being declined or rejected for financing, waiting is still a good idea. The dealership may put you in a low-rate financing or monthly payment tier, which may not come through as expected. If they made an error in their financing calculations, they have the leverage to bring you back in and fix the mistake, which could result in more costs for you.
An example of this, we worked with a client who went to a dealership to buy a car late at night, and they negotiated a great deal on a leased vehicle. The dealership factored in the car price and incentives from the factory, such as rebates, which were prevalent in 2017 or 2018. They also included incentives on the lease, which resulted in a lower rate and overall payment, making it an excellent deal.
The dealership delivered the car on the spot, but the customer refused to sign a bailment agreement, stating they did not want to take the car until the financing was approved. They wanted to ensure it was a done deal before committing. Therefore, they asked the dealership to call them the next day when the financing was finalized.
The dealership called back the following day and informed the customer that the deal might not be the same as what was initially proposed. The customer rejected the new offer and said they would look elsewhere for a car. Eventually, the dealership agreed to honor the original deal, and the customer returned to complete the transaction.
The customer in this scenario had good credit, so their financing approval was not an issue. However, the dealership made an error in calculating the lease deal incentive and the rebate incentive. They combined both incentives, which was not allowed. If they had completed a spot delivery, they could have called the customer back and demanded a higher payment. Since the customer did not take the car, they had more leverage to negotiate.
If the customer had taken possession of the car and enjoyed driving it, they would have been less likely to return to the dealership to redo the paperwork. Therefore, not accepting the car gave the customer more bargaining power. The dealership had to sell the car for a lower price, which may have resulted in a loss.
The dealership often includes a bailment agreement in the paperwork when you buy a car. This agreement requires you to bring the car back if they cannot secure financing for you. Do not accept this arrangement. Instead, tell them to call you once the financing is approved, and you are sure the deal will go through. You do not want to speculate with the dealership or commit to a deal that they can undo, leaving you without the same option.
It is unfair for the dealership to have the power to undo a deal while you do not. You want a level playing field. If they cannot commit to the deal, do not lock yourself into it either. Unless they are willing to give you the same option, do not sign the bailment agreement.
This issue has been recently highlighted in articles by Jalopnik, Steve Lehto, and Car and Driver. Dealerships are starting to include this tactic again in their playbook, which was popular in the 80s and 90s. To avoid any problems, do not accept the bailment agreement, as plenty of cars are available, and you can always find a dealer who will make the same deal for you.
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