COVID-19 & the Emerging Path for Indirect Auto Lending

Indirect Auto Lending Tip 1: Technology

One size does not fit all; process and flexibility are important especially if you would like your financial institution to stick out. The loan origination system must be flexible and easy to configure. If your organization is in the process of purchasing a new loan origination system, be sure to ask about flexibility and configuration.

AUTO-STRUCTURE

Credit decisions are now in your hands. Maximize your net checks and showcase an ideal structure for your customers’ needs with Auto-Structure. This tool allows dealers to input the customers desired monthly payment and down payment to adjust the deal structure. Westlake gives you the control to find the right structure. Check out the images to see how this program works.

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Specialty Vehicles Programs

Westlake offers financing on specialty vehicles. We offer flexible terms and low interest rates for qualified buyers so you can offer the best deals on any kind of vehicle to your customers. Recreational (RV) Vehicle Program Commercial Vehicle Program Classic Car Program Highline and Exotic Car Program

Indirect Loans vs. Direct Loans

Direct lending Indirect lending The lender has a direct relationship with the customer An intermediary facilitates the transaction between the lender and borrower Generally less risky for lenders Tends to be riskier for the lender The lender has more control over the application process and transaction The lender less control as the borrower interacts with the intermediary For borrowers, the process may take extra steps with the lender and the dealer/company For borrowers, the process is often easier because they deal with one party

If you’re applying for an installment loan, there are two ways you could go about it: apply for a direct loan or apply for an indirect loan.

If you take out a direct loan, the bank or credit union you apply with will issue the loan directly to you. You’ll likely start by working with a loan officer, who will approve you for the loan. Direct lending is usually an ideal path for borrowers with good credit because you’ll qualify for the best terms and rates.

Direct lending is also the safest route for the lender as they have more control over the financial transaction and can approve the borrower’s credentials firsthand.

But for some borrowers, applying for an indirect loan may be a better option. The borrower will apply for a loan with a third-party lender, using an intermediary to facilitate the loan. However, indirect loans are more expensive for borrowers and riskier for the lender.

Understanding an Indirect Loan (Dealer Financing)

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.

While this sort of indirect loan is often known as “dealer financing,” it’s actually the dealer’s network financial institutions that are approving the loan (based on the borrower’s credit profile), setting its terms and rates, and collecting the payments.

Although an indirect loan is offered through a dealer or retailer, the consumer is actually borrowing from a separate financial institution.

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Indirect Auto Lending Tip 3: Underwriting

Stipulations can be a real annoyance for dealers looking to close business quickly. They are meant to protect the lender on high risk loans but can be frustrating on low risk loans. Strict stipulations can often be time consuming for the dealer and may make it hard for your organization to find dealerships to partner with.   

3. Enhanced Program Competitiveness

If the credit union doesn’t already conduct a market analysis on a regular basis, starting this process is a great way to identify opportunities in a program. Compare your rate sheet to that of the top lenders in the area and find out if your program is in line with that of competitors. The bottom line is that the credit union always needs to know what’s going on in its market, and it can’t always rely on dealers to provide the necessary information. 

Indirect Loan Examples

Auto dealerships are one of the most common businesses involved with indirect loans; in fact, some authorities even call indirect loans a type of car loan.

Many consumers use dealer-financed loans for the convenience of being able to apply on-premises and to easily compare offers. On the downside, obtaining an auto loan directly from a bank or credit union on his own gives the buyer more leverage to negotiate, as well as the freedom to shop around among dealers. And the interest rates might be better. But if a buyer has a spotty credit history or low credit score, an indirect loan may be their best option.

Loans actively trade on the secondary markets as well – specifically, a pool of loans that have been combined rather than individual loans. Often a bank or credit union sells its consumer loans or mortgages; doing so allows lenders to acquire new capital, reduce administrative costs and manage their level of risk.

In the home-lending market, for example, the Federal National Mortgage Association (Fannie Mae) and Federal Home Loan Mortgage Corp (Freddie Mac) support the secondary trading of mortgages through their loan programs. These two government-sponsored enterprises buy home-backed loans from lenders, package them and then re-sell them, in order to facilitate liquidity and increased availability of funds across the lending market.

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