Indirect loan origination is a popular financing method largely used in auto purchases, where dealers act as intermediaries connecting borrowers with banks or credit unions. Rather than applying directly to a lender, consumers submit a single loan application through the dealer, who then sends it to affiliated lenders to secure loan offers.
Here’s a step-by-step overview of the process:
- You complete a credit application at the dealer’s finance office.
- The dealer submits the application to several lenders within their network.
- Lenders evaluate the application and send back offers, each with a “buy rate,” which is the base interest rate they are willing to offer.
- The dealer may increase this rate before presenting it to you; this increase, often called the “dealer reserve” or “dealer spread,” serves as the dealer’s commission.
- Upon acceptance, you sign the loan agreement, and payments are made directly to the lender.
A key distinction of indirect lending is this dealer markup, which means the interest rate offered might be higher than the original lender’s rate. This differs from direct lending, where the borrower deals straight with the financial institution, typically resulting in lower rates but less convenience.
Indirect loan origination isn’t limited to auto loans—it also appears in sectors like powersports, RVs, home improvement loans via contractors, and medical financing for elective procedures.
To get the best deal when using indirect loan origination:
- Get pre-approved with your own bank or credit union beforehand. This sets a benchmark rate and enhances your negotiating power.
- Know your credit score to anticipate loan terms.
- Ask the dealer if the rate they’re offering is the buy rate to understand any markup.
- Carefully review loan terms including the APR, loan duration, and any penalties.
Indirect loan origination offers convenience but requires informed decisions to avoid higher costs. Being prepared ensures you can benefit from streamlined financing while securing favorable loan terms.
For more detailed information about related loan terms, see our Loan Origination Process and Dealer Financing Explained articles.
External source: Consumer Financial Protection Bureau – Dealer Reserve Markup