Should You Get Indirect Auto Finance?

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Indirect auto financing occurs when a lender provides financing to the seller of the vehicle rather than the buyer directly. The seller then passes on the financing to the buyer, who makes regular monthly payments to repay the loan.

There are pros and cons to this approach to auto financing, so it’s important to understand all of your options before signing up for an indirect auto loan.

What is Indirect Auto Finance?

Indirect auto financing occurs when financing is provided to the seller of the vehicle, through a dealership, for example, instead of you arranging the financing yourself. Simply, you will get the financing in conjunction with the car itself.

In turn, the seller takes a commission or some other type of payment to connect you with the lender. This can take the form of a percentage that is added to your financing rate.

When you make the final payment, the lender releases the lien or title to the vehicle to you. During the term of the loan, you will also pay interest on the loan, as you would with a direct loan.

Other indirect loans

Indirect lending can also refer to the process of using a market or broker. With these options, you enter your personal information and are matched with one or more lenders.

Advantages and disadvantages of indirect financing

While indirect car financing can help you have a smoother car buying experience, it does have some downsides that you should consider before moving forward.

Benefits of Indirect Funding

In some cases, it makes more sense to finance through the dealership.

  • Shop and buy in one place. It is often more convenient to buy from the dealership. You will be able to shop and be financed at the same time.
  • Less leg work. While it’s always a good idea to get outside quotes, it’s not strictly necessary. If you wish, you can enter without applying to other lenders before choosing your car.
  • Bad credit options available. Specialty dealerships offer options for buyers with less than perfect credit.

Disadvantages of Indirect Funding

Before jumping in without funding aligned, consider these downsides.

  • The higher rates. The dealer often adds a percentage on top of what is offered by lenders that match your needs. This means you’ll likely get a better interest rate from a direct lender.
  • Not as much control. You cannot choose which lender your information is purchased from. If you already work with a bank or credit union, it may be beneficial to apply to them – you may get a better rate or terms than you otherwise would.
  • Not available for certain purchase types. If you are looking to buy from a private owner, financing through a dealership will not be an option.

How to get indirect auto financing

The steps for obtaining indirect auto financing are similar to the process for a traditional loan.

  1. Look for indirect lenders.
  2. Apply for your loan.
  3. Get your loan approved.
  4. Meet a dealer and choose your car.
  5. Sign your loan documents.
  6. Take delivery of your new car.

Alternatives to indirect auto financing

If you do not want to obtain indirect auto credit through a dealership, there are several other options for financing your future vehicle.

Bank

Most banks offer vehicle loans, although this can be a more involved process. If you have good credit, a bank might be the way to go. But if you have bad credit, this may not be the most viable option.

Box

Credit unions operate much like banks, but the members of the credit union are the primary target rather than the investors. You will likely need to become a member of the credit union, and membership requirements will vary from one to another. But joining a credit union that offers car loans can save you money.

Online lender

Using an online lender is another option for financing a car without going through a dealership. Many online lenders focus on offering low rates and reasonable loan terms, rather than the high commissions you might find at a traditional dealership.

The bottom line

When you’re ready to finance a car, the most important thing to do is shop around. Understand your options and that you don’t have to use the loans you are quoted for outside of the dealership if dealership financing ends up being a better deal.

At the very least, you can save hundreds if you find a lower interest rate or better loan terms by applying for external financing.

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