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Indirect Loan Definition

By Julia Kagan

Updated November 30 and December 31, 2020.

Reviewed by Khadija Khartit

What is an Indirect Loan?

An indirect loan could be an installment loan where the lender, whether the original issuer of the credit or, in the case of the present the holder of the debt is not in close relationship with the person who is borrowing.

Indirect loans are obtainable through an intermediary or a third party through the assistance by an intermediary. The loans that are traded on the secondary market may also be considered indirect loans.

In allowing borrowers to access credit through third-party partnerships, indirect loans can help to improve the availability of funds and manage risk. Many applicants who aren’t eligible for a direct loan can choose to take advantage of one that is an indirect loan instead. Indirect loans are generally more costly and carry higher rates of interest, for instance higher more expensive than the direct loans are.

Key Takeaways

When you take out an indirect loan the lender does not have an immediate relationship with the borrower who borrowed from a third-party, that is managed by an intermediary.

Indirect loans are frequently utilized in the automotive industry, with dealers helping buyers facilitate funding through their network of financial institutions and other lenders.

Indirect loans tend to be more costly than direct loans due to the fact that they are usually employed by people who would not otherwise qualify to receive a loan.

The understanding of an indirect loan (Dealer Financing)

A lot of dealerships, retailers and retail stores that deal with big-ticket products, like automobiles or recreational vehicles collaborate with a range of third-party lenders to help their customers obtain installment financing for purchases. Dealerships typically have lending networks which include several financial institutions who are willing to assist the sales of the dealership. Oftentimes, these lenders may be able approve more borrowers because of their relationship and the dealers.

In the indirect loan process, the borrower submits a credit application by way of the retailer. The application is then sent to the financing network of the dealership and the borrower is able to get multiple offers. The borrower is then able to select the most suitable loan for their situation. The dealer also gains by helping the customer receive financing, it makes the sale. Since the interest rate charged by the dealer’s loan is more likely to be higher than from a credit union or bank, it’s always best for buyers to check other financing options prior to deciding to finance their car through an agent.

While this sort or indirect loan is sometimes referred to as «dealer financing,» in reality, it’s the banks of the dealer’s network who are in charge of approving this loan (based on the borrower’s credit score) as well as determining its rates and terms, and collecting the payments.

Even though it is true that an indirect loan is made available through an intermediary or retailer but the borrower is taking out a loan from a separate financial institution.

How an Indirect Loan Works (Secondary Market)

These loans are not made directly by the lender that holds them are categorized as indirect loans. When a lender sells a loan they are no longer accountable for it and do not get any interest from the loan. Instead, all the assets are transferred to the new owner who takes on the responsibility of managing the loan and collects the repayments.

Take note of every indirect loan contract very carefully If the lender is unable to transfer the loan the buyer signed in the name of a loan provider, the lender may have the right to cancel the contract within a specified period of time and request that the buyer return the vehicle. The buyer will then be entitled to receive the amount of the down payment as well as the trade-in (or the amount from the sale) if a trade-in was included. In this scenario the dealer might attempt to persuade a buyer to sign a contract with less favorable terms, but the buyer is not required to sign it.

Indirect Loan Examples

Auto dealers are among the most commonly-used businesses associated with indirect loans; in fact, some authorities even call indirect loans the same as a car loan.

Many consumers use dealer-financed loans because of the ease of being able to apply in-person and easily look over offers. However, getting one automobile loan directly from a bank or credit union on his own gives the buyer more leverage to bargain, and also the ability to shop among dealers. The interest rates could be lower. But if a buyer has a shaky credit score or has a poor credit score then an indirect loan might be the most suitable option.

Loans are actively traded on secondary markets as well — specifically a group of loans that have been merged rather than individual loans. Most often, a bank or credit union sells its consumer loans or mortgages; doing this allows lenders to obtain new capital, cut administrative costs and manage their risk.

In the lending market for homes such as the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corp (Freddie Mac) provide support for the secondary trading of mortgages by way of the loan programs. These two government-sponsored enterprises buy loans that have a home backing loans from lenders, package the loans and then re-sell, in order to facilitate liquidity and increased availability of funds across the lending market.

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