Indirect Loan

An indirect loan can refer to an installment loan in which the lender – either the original issuer of the debt or the current holder of the debt – does not have a direct relationship with the borrower.

Indirect loans can be obtained through a third party with the help of an intermediary. Loans trading in the secondary market may also be considered indirect loans.

By allowing borrowers to obtain financing through third-party relationships, indirect loans can help to improve funding availability and risk management. Often applicants who don't qualify for a direct loan can opt for an indirect loan instead. Indirect loans tend to be more expensive – carry higher interest rates, that is – than direct loans are.

Many dealerships, merchants and retailers that handle big-ticket items, such as cars or recreational vehicles, will work with a variety of third-party lenders to help their customers obtain installment financing for purchases. Dealerships often have lending networks that include a variety of financial institutions willing to support the dealership’s sales. Oftentimes, these lenders may be able to approve a wider range of borrowers due to their network relationship with the dealer.

In the indirect loan process, a borrower submits a credit application through the dealership. The application is then sent to the dealership’s financing network, allowing the borrower to receive multiple offers. The borrower can then choose the best loan for their situation. The dealership also benefits, 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 from a credit union or bank, it's always best for buyers to check other financing options before agreeing to finance their car through a dealer.

Loans not originated directly by the lender that holds them can be considered indirect loans. When a lender sells a loan they are no longer responsible for it or receive any interest income from it. Instead, everything is transferred to a new owner, who assumes the burden of administering the loan and collects the repayments.

Read any indirect loan contract very carefully: If the dealer cannot sell the loan the buyer signed to a lender, it may have the right to cancel the contract within a specified period of time and require the buyer to return the car. The buyer is then entitled to get back the down payment and trade-in (or the value of the trade-in) if a trade-in was involved. In this situation, the dealer may try to pressure a car buyer to sign another contract on less favorable terms, but the buyer is not required to sign it.

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