What is an indirect loan?
An indirect loan is typically an auto loan that a borrower obtains through a dealership from another financial institution. It’s commonly referred to as “dealer financing.”
In arranging indirect loans, auto dealerships work with multiple lenders to help car buyers find terms that fit their budgets.
Buyers fill out the application forms at the dealership, but it’s the finance company that makes the loan decision, collects the monthly installment payments, and takes loan defaulters to court.
Indirect loans can be convenient, especially for consumers with blemished credit, because they don’t have to shop around at various lenders to try to secure a loan. The dealer can quickly handle the entire loan application process on the premises, drawing on relationships with multiple finance companies.
However, obtaining a car loan directly from a bank gives the buyer more leverage to negotiate the price of the car and the value of a trade-in vehicle, as well as the freedom to shop around among dealers.
Indirect loan example
Soon after college graduation, Bob decides to trade in his first car, bought for him by his parents, for a new vehicle. Bob has started a job, but hasn’t yet established credit. He visits several local banks, but is turned down for a direct loan each time.
On a friend’s suggestion, Bob goes to an auto dealership and fills out a single loan application. He receives three offers for indirect loans from finance companies. He selects the one with the most favorable terms.
Bob will pay a higher interest rate on the indirect loan. Yet, he is driving a brand-new car off the lot on the same day that he applied for the loan. Moreover, he will be able to raise his credit score by making his monthly payments to the finance company on time.
Use Bankrate’s calculator to compare direct auto financing from a bank or credit union with indirect, low-interest dealer financing.