Car loans are long-term debt that allow buyers to purchase new or pre-owned vehicles. You agree to repay the lender with interest over time; until that occurs, ownership of the car remains with its seller.
Wall Street once relied heavily on used-car lenders for lucrative returns; however, regulators are now filing suits against them over allegations of predatory practices. Learn about auto loans from loan terms to monthly payments here.
Indirect financing
When applying for financing at a dealership, their finance department may shop their application to multiple lenders at once – saving time by eliminating research time and visits to each lender individually – while giving dealers more control of both loan process and interest rate. This may help speed up approval timeframes but could mean the dealer having more control of how and why loan applications are approved than necessary.
Finance departments tend to add their own markup on loans that are being considered, which could make them less competitive. Furthermore, dealers will have an incentive to increase sales volume and thus income and may not care as much about finding an optimal car loan loan that suits individual borrower requirements.
Indirect car loans are loans not directly issued by the lender that holds a lien on the vehicle, but sold instead to dealers or network financial institutions who take responsibility for administering and collecting payments from these loans.
Most indirect financing comes through dealer-arranged finance companies or car dealerships, while online lending platforms often use indirect loans as well. Such platforms connect buyers with multiple potential lenders by collecting their information in a database that matches them with one at an additional fee.
Once they find a vehicle that they can afford to purchase, the buyer must negotiate with their lender in order to complete the deal and receive their funds.
Banks must carefully manage the risks associated with indirect financing arrangements. All credit decisions, including approvals with policy exceptions, must be documented; dealer performance needs to meet consumer compliance standards; and it should also be possible for banks to conduct on-site reviews at dealers if needed.
Credit Unions and Indirect Auto Financing
More and more credit unions are collaborating with dealerships to offer indirect auto financing. This partnership allows the credit union to maintain its unique underwriting standards while offering convenient new-car buying customers and cultivating long-term relationships with dealers. It may even prove more profitable than direct lending as it creates a steady flow of indirect new-auto volume without incurring overhead and staff support costs for direct lending to individuals.
While indirect financing’s advantages are obvious, it is crucial that financial professionals understand its associated risks. Dealerships could potentially inflate borrower incomes to qualify them for loans and neglect filing timely documents with regulators resulting in regulatory fines for credit unions and other financial institutions. It is therefore imperative for this industry to develop strategies which protect both its lending programs and borrowers.