Games Dealers Play: Refusing to Refund the Deposit


Some car dealerships can be quite aggressive when it comes to asking for a deposit on a car, and consumers are often persuaded to pay hundreds or even thousands of dollars as a deposit. Some salesmen will say that the deposit is necessary to “hold” the car, claiming another buyer is “very interested” and might be back at any moment.   Other salesmen might suggest that the deposit is necessary to demonstrate to a manager or a bank that the buyer is serious. Whatever the reason, many consumers pay large deposits before they know important terms such as the car’s purchase price, the interest rate, the monthly payment, or what additional amounts may have to be paid as a down payment.  Problems arise when the deal does not go through and the dealership refuses to refund the deposit.


Most dealerships use a “purchase order” form that states that any deposit is nonrefundable.  This contract language, known as a “liquidated damages” clause, provides that if the consumer does not go ahead with the purchase, the dealership can keep the deposit as damages. As shown below, these clauses are frequently not enforceable.


For example, sometimes a dealership will insist upon “packing” a contract by requiring that a consumer buy a service contract, GAP, or other extras. If the dealership did not disclose these requirements to the consumer in the purchase order, then the dealership is changing the deal. Since it is the dealership and not the consumer who is not honoring the initial purchase order, the consumer should be able to recover the deposit.


If the dealership is unable to approve financing for the deal, and if the dealership and the consumer both understood that financing would be required, then the consumer should be able to recover. Under those circumstances, the consumer and the dealership agreed that there would be no purchase unless there was financing. That is known as a condition precedent, and if the financing falls through, then the deposit should be refunded. The same is true if the terms of financing are different from what the dealership and the consumer discussed before the deposit was paid, if the interest rate or monthly payments are higher than discussed, or if the dealership says that the consumer needs to find a co-signer or pay a larger down payment.


A consumer may also be able to get the deposit back if the dealership did anything deceptive. Most states, including Connecticut, have laws that prohibit businesses like car dealerships from engaging in unfair or deceptive acts or practices. If a dealership acted deceptively in persuading a consumer to pay a deposit, then the consumer may be able to bring suit under those laws.


Even if a dealership did not try to change the deal, was ready to finance, and did not do anything deceptive, a consumer can usually sue to get a deposit back.  Courts in Connecticut and elsewhere will not permit a dealership to keep a deposit if it determines that the “liquidated damages” clause in that contract was excessive and was not intended as an estimate of the damages that a dealership would suffer if the consumer backed out of the deal.  One decision by the Connecticut Supreme Court held that a business can enforce this type of clause only if:


(1) The damage which was to be expected as a result of a breach of the contract was uncertain in amount or difficult to prove; (2) there was an intent on the part of the parties to liquidate damages in advance; and (3) the amount stipulated was reasonable in the sense that it was not greatly disproportionate to the amount of the damage which, as the parties looked forward, seemed to be the presumable loss which would be sustained by the contractee in the event of a breach of the contract.


In the typical car dealership deposit case, the application of this test will not support a dealership’s efforts to keep a deposit. The amount paid by different consumers varies wildly and has more to do with how much the dealership can get than any estimate of its damages. The deposit is frequently much more than the cost of the dealership employees in working on the deal and is sometimes more than the dealership would make in profit if the deal went through...


Sometimes consumers will benefit from consulting with a consumer attorney if a dealership refuses to return a deposit. Consumers might also be able to recover the security deposit from the dealership in small claims court.


The best strategy for the consumer is to avoid giving a significant deposit until after all contract terms have been disclosed and a final purchase decision has been made.  Or, if a deposit is paid, consumers should insist that the dealership agree in writing that the deposit will be refunded if the deal is not finalized.


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