I'm Lucy, and I'd be happy to answer your questions today. I'm sorry to hear that this happened.
The dealer is wrong. If your contract was contingent upon you obtaining financing for the vehicle, then the contract failed when the loan was declined - and that means each party must be put into the position they'd be in if the contract hadn't occurred. You get your money back, they get the car back. They could charge you a reasonable fee for use of the car - but that's typically about $15/day. Charging $1,000 for using a used car for a week is ridiculous and excessive. There shouldn't be any financing fees if the loan was denied. People don't pay to get declined for loans.
You can sue in Small Claims Court for the money they're keeping, plus your filing fees. You'll need a copy of the original contract, a copy of the cancelled check showing what you paid, and any documentation that shows you were declined for the loan. You do not need a lawyer. Here is more information on the process:
Another option is to send a demand letter, via certified mail, letting the dealer know that you'll be suing if they do not return the rest of your money. If there is someone higher up at the dealership, you could try talking to the owner or manager to see if they'll give you the extra $1,000 to avoid the bad press of a lawsuit. But you're allowed to go to court and sue if they won't give you the money back.
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