Indirect car financing is when a lender provides financing to the seller of the vehicle rather than directly to the buyer. The seller then passes the financing on to the buyer and the buyer makes regular monthly payments to pay off the loan.
This approach to car financing has advantages and disadvantages, so it is important to understand all your options before taking out an indirect car loan.
What is indirect car financing?
Indirect car financing is when financing is provided to the seller of the vehicle, for example through a dealer, instead of you arranging the financing yourself. You simply get the financing in combination with the car itself.
In turn, the seller collects a commission or other type of payment to put you in touch with the lender. This can be in the form of a percentage that is added to your financing percentage.
When you make the final payment, the lender will release the lien or title on the vehicle to you. During the term of the loan, you also pay interest on the loan, just like with a direct loan.
Other indirect loans
Indirect loans can also refer to the process of using a marketplace or broker. With these options you fill in your personal details and you are matched with one or more lenders.
Advantages and disadvantages of indirect financing
While indirect car financing can help you have a more seamless car buying experience, it has some drawbacks that you should consider before proceeding.
Benefits of indirect financing
In some cases, it makes more sense to finance through the dealer.
- Shop and buy in one place. Buying from the dealer is often more convenient. You can shop and get financed all at once.
- Less leg work. While it’s still a good idea to get outside quotes, it’s not strictly necessary. If you like, you can go in without applying to other lenders before choosing your car.
- Bad credit options available. Specialty dealers offer options for buyers with less than perfect credit.
Disadvantages of indirect financing
Before moving in without financing in line, consider these drawbacks.
- Higher rates. The dealer often adds a percentage on top of what is offered by lenders that meet your needs. This means that you are likely to get a better interest rate with a direct lender.
- Not so much control. You can’t choose which lender your information is shopped at. If you already work with a bank or credit union, it may be helpful to sign up to one – you may get a better rate or better terms than you otherwise would.
- Not available for some types of purchases. If you want to buy from a private owner, financing through a dealer is not an option.
How to obtain indirect car financing?
The steps for obtaining indirect car financing are similar to the process for a traditional loan.
- Look for indirect lenders.
- Apply for your loan.
- Get approval for your loan.
- Meet a dealer and choose your car.
- Sign your loan documents.
- Take delivery of your new car.
Alternatives to indirect car financing
If you don’t want to get an indirect car loan through a dealer, there are several other options for financing your future vehicle.
Most banks offer vehicle loans, although this can be a more complicated process. If you have good credit, a bank may be the way to go. But if you have bad credit, this may not be the most viable option.
Credit unions work just like banks, but credit union members are the primary focus rather than investors. You will likely need to join the credit union and membership requirements will vary from one to another. But joining a credit union that provides auto loans can save you money.
Using an online lender is another option to finance a car without going through a dealership. Many online lenders focus on offering low rates and reasonable loan terms, rather than the hefty commissions you might find at a traditional dealer.
it comes down to
When you are ready to finance a car, the most important thing is to shop around. Understand your options and that you won’t have to use loans that you have been quoted outside of the dealership if dealership financing becomes a better deal.
You can at least save hundreds if you find a lower interest rate or better loan terms by applying for outside financing.