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Indirect Loan Definition
By Julia Kagan
Updated November 30, 2020
Reviewed by Khadija Khartit
What is An Indirect Loan?

An indirect loan could refer to an installment loan where the lender – either the original issuer of the debt or the current holder of the debt – has no direct relationship with the borrower.

Indirect loans can be obtained through an intermediary or a third party through the assistance of an intermediary. The loans that are traded on the secondary market can also be thought of as 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 could opt for one that is an indirect loan instead. Indirect loans tend to be more costly and carry higher rate of interest higher than the direct loans are.
Key Takeaways

With an indirect loan, the lender does not have a direct relationship with the borrower who borrowed from a third party that is managed by an intermediary.
Indirect loans are frequently used in the auto industry, with dealers helping buyers get financing through their networks of financial institutions and other lenders.
Indirect loans are usually more costly than direct loans, as they are usually utilized by those who may not otherwise be eligible for a loan.

The understanding of an indirect loan (Dealer Financing)

A lot of dealerships, retailers and retail stores that deal with big-ticket things, such as cars and recreational vehicles, are able to work with a variety of third-party lenders to assist their customers in obtaining installment loans to finance purchases. Dealerships usually have lending networks which include several financial institutions willing to support the sales of the dealership. Oftentimes, these lenders may be able to approve a wider range of borrowers because of their relationships and the dealers.

When it comes to the indirect loan procedure, a borrower submits a credit application via the dealer. The application is then sent to the financing network for the dealership and the borrower is able to get multiple offers. The borrower can then choose the most suitable loan to suit their needs. The dealer also gains in that, by helping the customer receive financing, it helps make the purchase. Because the interest rate on the dealer’s account is more likely to be higher than a credit union or bank It is always advisable for buyers to check other financing options before agreeing to finance their vehicle with the dealer.

Although this type or indirect loan is sometimes referred to in the context of “dealer financing” is actually dealers’ network of financial institutions that are approving this loan (based upon the borrower’s credit profile), setting the rates and terms and collecting the loan payments.

Although it is true that an indirect loan is made available through an intermediary or retailer but the borrower is borrowing from a separate financial institution.
How an Indirect Loan Works (Secondary Market)

The loans that are not directly originated by the lender that holds them may be considered indirect loans. When a lender sells the loan they are no longer accountable for it, nor do they receive any interest income from it. Instead, all the assets are transferred to a new owner, who assumes the responsibility of managing the loan and collecting the repayments.

Check every indirect loan contract with care The dealer is not able to offer the loan the buyer has signed with a bank, it may have the right to terminate the contract within the specified time and request that the buyer return the vehicle. The buyer is then entitled to receive the deposit and trade-in (or the amount that the vehicle was traded in for) if a trade-in was involved. In this situation, the dealer may attempt to force a buyer to sign a different agreement with more favorable terms, however the buyer is not required to sign it.
Indirect Loan Examples

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

Many consumers use dealer-financed loans due to the convenience of being able to apply on-site and compare offers. On the downside, obtaining one automobile loan directly from an institution like a credit union or bank on his own gives the borrower more power to bargain, and also the freedom to shop around between dealers. The interest rates could be better. But if a buyer has a spotty credit score or has a poor credit score, an indirect loan may be their most suitable option.

Loans actively trade on the secondary markets as well – specifically a pool of loans which have been combined rather than individual loans. Most often, a bank or credit union offers its customers loans or mortgages. Doing so allows lenders to acquire new capital, reduce administrative costs and manage their risk.

In the home-lending market For instance, the Federal National Mortgage Association (Fannie Mae) and Federal Home Loan Mortgage Corp (Freddie Mac) provide support for the second-hand trade of mortgages via the loan programs. These two companies sponsored by the government purchase home-backed loans by lenders. The lenders then package them and then re-sell them, in order to facilitate liquidity and improve the availability of funds across the lending market.
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