Indirect auto financing is when a lender provides financing to the vehicle seller instead of directly to the buyer. The seller then passes the financing along to the buyer, and the buyer makes regular monthly payments to pay off the loan.
This approach to vehicle financing comes with benefits and drawbacks so it is important to understand all your options before signing off on an indirect auto loan.
What is indirect auto financing?
Indirect auto financing is when financing is provided to the seller of the vehicle, through a dealer, for example, instead of you organizing the financing yourself. Simply, you will obtain the financing in conjunction with the car itself.
In turn, the seller collects a commission or other type of payment for connecting you with the lender. This can be in the form of a percentage that’s added to your financing rate.
When you make the final payment, the lender will release the lien or title on the vehicle to you. During the loan term, you will also pay interest on the loan, just as you would with a direct loan.
Other indirect loans
Indirect loans can also refer to the process of using a marketplace or broker. With these options, you enter your personal information and are matched with one or more lenders.
Pros and cons of indirect financing
Although indirect auto financing can help you have a more seamless car-buying experience, it comes with some drawbacks that you should consider before going ahead.
Pros of indirect financing
In some cases, it makes more sense to finance through the dealership.
- Shop and buy in one place. It’s often more convenient to buy at the dealership. You’ll be able to shop and get financed all at once.
- Less legwork. Though it is still a good idea to get outside quotes, it is not strictly necessary. If you want, you can go in without applying with other lenders before choosing your car.
- Bad credit options available. Specialty dealers offer options for buyers with less than perfect credit.
Cons of indirect financing
Before you go in without financing lined up, consider these drawbacks.
- Higher rates. The dealership often adds a percentage on top of what is offered by lenders that match your needs. This means that you will likely get a better interest rate with a direct lender.
- Not as much control. You don’t get to choose which lender your information is shopped around with. If you already work with a bank or credit union, it can be beneficial to apply with it — you may get a better rate or terms than you would otherwise.
- Unavailable for some purchase types. If you’re looking to buy from a private owner, financing through a dealership won’t be an option.
How to obtain indirect auto financing
The steps to obtaining indirect auto financing are similar to the process for a traditional loan.
- Look for indirect lenders.
- Apply for your loan.
- Get approved for your loan.
- Meet with a dealer and choose your car.
- Sign your loan documents.
- Take delivery of your new car.
Alternatives to indirect auto financing
If you don’t want to get an indirect auto loan through a dealership, there are several other options for financing your future vehicle.
Most banks offer loans for vehicles, although it can be a more involved process. If you have good credit, a bank could be the way to go. But if you have bad credit, this might not be the most viable option.
Credit unions operate much like banks, but members of the credit union are the primary focus rather than investors. You will likely need to become a member of the credit union, and the membership requirements will vary from one to the next. But joining a credit union that provides auto loans can save you money.
Using an online lender is another option for financing a car without going through a dealership. Many online lenders focus on offering low rates and reasonable loan terms, rather than the hefty commissions you might find at a traditional dealership.
The bottom line
When you are ready to finance a car, the most important thing to do is shop around. Understand your options and that you don’t have to use any loans you are quoted for outside the dealership if the dealership financing ends up being a better deal.
At the very least, you can save hundreds if you find a lower interest rate or better loan terms by applying for outside financing.