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Indirect Loan Definition

By Julia Kagan

Updated November 30 and December 31, 2020.

Review by Khadija Khartit

What is the definition of an Indirect Loan?

An indirect loan could refer to an installment loan in which the lender, whether the issuer who issued the initial loan or currently the owner of the debt is not in direct relationship with the person who is borrowing.

Indirect loans can be obtained from an intermediary with the help from an intermediary. The loans that are traded on the secondary market may also be considered indirect loans.

In allowing borrowers to access loans through third-party relationships indirect loans can help to improve funding availability and risk management. Many applicants who aren’t eligible for a direct loan can prefer one that is an indirect loan instead. Indirect loans are generally more costly and carry higher rate of interest – more expensive than the direct loans are.

Important Takeaways

In an indirect loan, the lender doesn’t have any direct contact with the borrower who borrowed from a third party, which is arranged through an intermediary.

Indirect loans are often employed in the automotive sector dealers assisting buyers facilitate funding through their network of financial institutions as well as other lenders.

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

Learning about an indirect loan (Dealer Financing)

Numerous dealerships, merchants and retail stores that deal with big-ticket products, like cars and recreational vehicles, collaborate with a range of third-party lenders in order to help their customers obtain installment financing for purchases. Dealerships typically have lending networks that comprise a variety of financial institutions that are willing to help the sales of the dealership. Oftentimes, these lenders may be able to approve more borrowers because of their relationship and the dealers.

When it comes to the indirect loan procedure, a applicant submits a credit request through the dealership. The application is then forwarded to the financing network of the dealership which allows the borrower to receive multiple offers. The borrower is then able to select the most appropriate loan suitable for their circumstances. The dealer also gains by helping the customer obtain financing, it helps make the sale. Since the interest rate charged by the dealer will likely be higher than that of a credit union or bank It is always advisable for buyers to look into other financing options prior to deciding to finance their car through an agent.

While this sort of indirect loan is sometimes referred to as “dealer financing” it’s actually the dealer’s network financial institutions who approve this loan (based on the borrower’s credit profile), setting the rates and terms, and collecting the payments.

Even though the indirect loan is made available through a dealer or retailer however, the customer is borrowing from a different financial institution.

How an Indirect Loan Works (Secondary Market)

These loans are not made directly by the lender that holds them can be considered indirect loans. When a lender sells a loan they are no longer accountable for it, nor do they get any interest from it. Instead, all the assets are transferred to a new owner who takes on the burden of administering the loan and collecting the repayments.

Read every indirect loan contract carefully The dealer is not able to transfer the loan the buyer has signed with a bank, the lender might be entitled to terminate the contract within a specified period of time and require the buyer to return the vehicle. The buyer will then be entitled to receive the down payment and trade-in (or the amount from the sale) if a trade-in was included. In this situation the dealer could attempt to persuade a buyer to sign another contract with lower terms, but the buyer isn’t obliged to sign the contract.

Examples of Indirect Loans

Auto dealerships are among the most common businesses involved in indirect loans; in fact certain authorities consider indirect loans an alternative to a car loan.

A large number of people take advantage of dealer-financed loans due to the convenience of being able to apply in-person and easily compare deals. However, getting the auto loan directly from the credit union or bank by itself gives the buyer more leverage to negotiate, as well as the freedom to shop around with dealers. Also, the rates for interest could be higher. But if a buyer has a shaky credit history or low credit score and is in need of an indirect loan may be their best choice.

Loans actively trade on the secondary markets too – specifically, a collection of loans that have been combined instead of individual loans. A lot of times, a credit union offers its customers loans or mortgages. Doing this allows lenders to obtain new capital, lower administrative costs and manage their risk.

In the lending market for homes such as there are two organizations: Federal National Mortgage Association (Fannie Mae) and Federal Home Loan Mortgage Corp (Freddie Mac) support the secondary trading of mortgages by way of their loan programs. These two companies sponsored by the government purchase home-backed loans by lenders. The lenders package them , and then sell them, in order to facilitate liquidity and increase the liquidity across the market for lending.