What is the Deferred Down Payment Scam?

The deferred down payment car dealer scam can put you in a bad financial position.

The deferred down payment scam is also known as the “DIP note” or “Pick-up Payment scam.” The deceptive dealer tactic can quickly put you in financial hardship at the beginning of your car loan.

If you try to buy a car without enough money for a down payment, the dealer will most likely work with you to get you inside the vehicle, but it may not be in your best interests.

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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 with less than perfect credit history.

Dealers use the deferred down payment process to get car buyers to put more money down on a vehicle than they initially expected when buying a new or used car.

This scam most commonly happens when the dealer dangles an additional offer in front of the customer who doesn’t have the extra funds available at the time of purchase. The customer believes they will get a better deal if they come up with an additional amount of money down towards purchasing a car.

In a car dealership, deferred down payments are treated like “NO BIG DEAL.” The technique is used when a customer does not have the funds available to pay the entire down payment upfront when 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 the car dealer doesn’t add the itemized information such as the date the checks are due or the balance of payments into the contract. This creates obligations that aren’t included in the purchase agreement or a single document.

How the Deferred Down Payment Scam Works

You 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. The 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 have to wait to buy the car so that you can save up some more money.

The salesman will 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 a payment plan for how you will pay the remaining $1,500 balance.

You decide to write three checks for $500 apiece 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 Dealership 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. It will also include the amount to be deposited and any provisions regarding returned check fees that may incur.

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 process hold checks through a company like TeleCheck before accepting them as a form of payment. Some hold check agreements have a section 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 You Commit to a Deferred Down Payment

Before committing to a hold check agreement, consider these alternatives.

Make sure you have the money available when the hold check is due.
Bump yourself down and buy a less expensive vehicle that fits your budget.
Stop the car buying process and wait until you have the total amount of money available.
Acquire a pre-approved auto loan online before contacting a dealership. This will give you leverage when negotiating a car loan with a dealership.
You do not have to buy the car right now (no matter how much you love it). I promise you; that the manufacturer will make more.

How a Deferred Down Payment Hurt You Financially

It’s funny how many of us 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 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.

Writing three checks for $500 to be deposited over the next three months will create an unexpected and un-budgeted 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 worse if the repo man comes to get your car after only owning it for two months.

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 everyday bills. This means you will have an additional $500 expense going out on top of your monthly budget. If you don’t have that expendable income, you will suffer for a few months, which could affect your overall creditworthiness.

How to Avoid the Deferred Down Payment Scam

The easiest way to avoid the deferred down payment scam is not to buy a new or used car until you have the entire 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 over the life of the loan.

“If you can’t afford the down payment, you can’t afford the car.”

Saving a minimum of 15 – 20% down before buying a vehicle puts you in great shape when saving on finance charges and bank fees. It also allows you to finance for a shorter term and become upside down or in a negative equity situation when it comes time to trade the car in.

Further Tips and Advice

Further protection from the deferred down payment scam:

Only use car dealership financing options as a last resort.
Get pre-approved through your bank or 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. You can dispute credit card charges.
Figure the car dealer’s actual cost and calculate a fair profit offer on any new car you want to buy before visiting a dealership.

About the author
My name is Carlton Wolf, and I’ve been in the car business since 1994, both retail and wholesale. I created the Auto Cheat Sheet to better educate buyers about the deceptive sales practices many dealerships use nationwide. Please understand that not all car dealers are dishonest. However, you never know who you’ll be dealing with, though. I’m willing to share my knowledge and experience with anyone who listens. Keep in mind that I’m a car guy, not a writer.