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Indirect Loan Definition

By Julia Kagan

Updated November 30, 2020

Review by Khadija Khartit

What Is an Indirect Loan?

An indirect loan can refer to an installment loan where the lender – whether it is the issuer who issued the initial loan or currently the owner of the debt has no close relationship with the person who is borrowing.

Indirect loans are obtainable through a third party with the help from an intermediary. The loans that are traded on the secondary market could also be considered indirect loans.

Through allowing borrowers access to financing through third-party relationships, indirect loans can help to improve funding availability and risk management. Most applicants who do not qualify for a direct loan can opt for the indirect loan instead. Indirect loans are generally more costly and carry higher rate of interest more expensive as the direct loans are.

Important Takeaways

In an indirect loan an indirect loan, the lender does not have an immediate relationship with the borrower who borrowed from a third party arranged by an intermediary.

Indirect loans are often used in the auto industry and dealers aiding customers obtain financing 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 typically used by borrowers who might not otherwise qualify to receive the loan.

Learning about an indirect loan (Dealer Financing)

A lot of dealerships, retailers and retailers that handle big-ticket things, such as cars or recreational vehicles, collaborate with a range of third-party lenders in order to aid their customers to obtain installment loans for purchases. Dealerships usually have lending networks that include various financial institutions that are willing to help the dealership’s sales. Oftentimes, these lenders may be able approve an array of lenders because of their relationships to the dealership.

Through the indirect loan process, a applicant submits a credit request through the dealership. The application is sent to the financing network for the dealership and the borrower is able to be offered a variety of loans. The borrower is then able to select the most suitable loan to suit their needs. Dealers also benefit, because by helping the customer obtain financing, it makes the sale. Because the rate of interest on the dealer’s loan will likely be higher than from banks or credit unions It is always advisable for buyers to look into different financing options before deciding to finance their car through a dealer.

This kind in indirect loan is commonly referred to by the name of “dealer financing,” it’s actually the banks of the dealer’s network that are approving this loan (based according to the borrower’s credit score) and deciding on its rates and terms and collecting the loan payments.

Even though the indirect loan is offered through an intermediary or retailer, the consumer is actually borrowing from a different financial institution.

How an Indirect Loan Works (Secondary Market)

The loans that are not directly originated by the lender who holds them can be considered indirect loans. If a lender decides to sell the loan they are no longer accountable for it and do not receive any interest income from it. Instead, everything is transferred to the new owner, who is able to take on the responsibility for managing the loan and collecting the repayments.

Read every indirect loan contract carefully If the lender is unable to transfer the loan the buyer signed to a lender, the lender may have the right to terminate the contract within certain timeframes and demand that the buyer return the vehicle. The buyer then has the right to receive the down payment and trade-in (or the amount that the vehicle was traded in for) when a trade-in was included. In this case the dealer might attempt to force a buyer to sign another contract with more favorable terms, however the buyer is not required to sign the contract.

Indirect Loan Examples

Auto dealerships are among the most popular businesses that deal with indirect loans and, in actuality some authorities call indirect loans the same as a auto loan.

A large number of people take advantage of dealer-financed loans because of the ease of being able to apply on-premises and to easily look over offers. On the downside, obtaining one automobile loan directly from a bank or credit union by itself gives the borrower more power to bargain, and also the freedom to shop around with dealers. Also, the rates for interest could be higher. If a buyer has a spotty credit history or a low score, an indirect loan may be their most suitable option.

Loans are actively traded on secondary markets too – specifically a group of loans that have been combined rather than individual loans. A lot of times, a credit union offers its customers loans or mortgages. Doing this allows lenders to obtain new capital, lower the administrative expenses and reduce 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) provide support for the secondary trading of mortgages through their loan programs. These two companies sponsored by the government purchase home-backed loans from lenders, bundle them and then re-sell them in order to provide liquidity and increased liquidity across the market for lending.

KAS

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