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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 could refer to an installment loan that is a loan where the lender – either the issuer who issued the initial loan or currently the holder of the debt – is not in close relationship with the borrower.

Indirect loans are obtainable through a third party with the assistance by an intermediary. In the secondary market, loans traded in the market could also be considered indirect loans.

By allowing borrowers to obtain loans through third-party relationships indirect loans can aid in improving access to funding and reduce risk. Often applicants who don’t qualify for a direct loan can choose to take advantage of an indirect loan instead. Indirect loans are generally more expensive – carry higher rates of interest, for instance more expensive than the direct loans are.

The most important takeaways

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

Indirect loans are frequently employed in the automotive sector dealers assisting buyers facilitate funding through their networks of financial institutions and other lenders.

Indirect loans are usually more costly than direct loans, as they are usually employed by people who would not otherwise be eligible to receive a loan.

The understanding of an indirect loan (Dealer Financing)

A lot of dealerships, retailers and retailers that handle big-ticket things, such as cars or recreational vehicles, are able to work with a variety of third-party lenders to help their customers obtain installment financing for purchases. Dealerships typically have lending networks that include various financial institutions who are willing to assist the sales of the dealership. Oftentimes, these lenders may be able to accept a wider range of borrowers due to their network relationship with the dealer.

Through the indirect loan process, a borrower fills out a credit application through the dealership. The application is then forwarded to the dealership’s financing network, allowing the borrower to receive multiple offers. The borrower then has the option of choosing the best loan to suit their needs. Dealers also benefit, in that, by helping the customer receive financing, it makes the sale. Because the interest rate on the dealer is likely to be higher than a credit union or bank, it’s always best for customers to research other financing options before agreeing to finance their vehicle with a dealer.

This kind of indirect loan is sometimes referred to in the context of «dealer financing» is actually banks of the dealer’s network who approve the loan (based on the borrower’s credit profile) and deciding on the rates and terms, and collecting the payments.

Although an indirect loan is provided by a dealer or retailer however, the customer is taking out a loan from a separate financial institution.

How does an Indirect Loan Work (Secondary Market)

The loans that are not directly originated by the lender that holds them are categorized as indirect loans. If a lender decides to sell a loan they cease to be accountable for it, nor do they get any interest from the loan. Instead, all the assets are transferred to the new owner, who assumes the responsibility for managing the loan and collecting the repayments.

Check any indirect loan contract very carefully If the lender is unable to offer the loan the buyer signed in the name of a loan provider, it could be able to terminate the contract within certain timeframes and require the buyer to return the car. The buyer is then entitled to get back the down payment and trade-in (or the amount of the trade-in) in the event that a trade-in is involved. In this situation, the dealer may try to pressure a car buyer to sign a different agreement with lower terms, but the buyer isn’t required to sign the contract.

Indirect Loan Examples

Auto dealerships are among the most popular businesses that deal in indirect loans; in fact some authorities call indirect loans a type of car loan.

A lot of consumers take advantage of dealer-financed loans due to the convenience of being able to apply on-site and evaluate offers. On the downside, obtaining an automobile loan directly from the credit union or bank on his own gives the borrower more power to bargain, and also the ability to shop between dealers. And the interest rates might be higher. However, if the buyer has a shaky credit history or a low score, an indirect loan might be the most suitable option.

The loans are traded on secondary markets as well – specifically a pool of loans that have been merged rather than individual loans. A lot of times, a credit union sells its consumer loans or mortgages; doing this allows lenders to obtain new capital, cut administration costs, and control their level of risk.

In the home-lending market For instance, there are two organizations: Federal National Mortgage Association (Fannie Mae) and Federal Home Loan Mortgage Corp (Freddie Mac) support the trading of mortgages through the loan programs. These two government-sponsored companies purchase mortgages that are home-backed loans by lenders. The lenders bundle the loans and then re-sell to help facilitate liquidity and increased availability of funds across the lending market.

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