Indirect Loan

An indirect loan is an installment loan arranged through an intermediary rather than directly between the borrower and the ultimate lender. Commonly used in industries that sell big-ticket items (especially auto dealerships), the intermediary—such as a dealer or retailer—submits the borrower’s application to one or more third‑party lenders. The lender that ultimately funds the loan typically sets the terms, collects payments, and holds the borrower relationship.

Key takeaways

• The borrower applies through an intermediary; the actual lender is a third party.
• Commonly used for auto and recreational-vehicle financing (dealer financing).
• Indirect loans often carry higher interest rates and fees than direct loans.
• Loans sold on secondary markets (or pooled and resold) are also considered indirect in that the current holder may not be the original originator.

How dealer (intermediated) indirect loans work

1. Buyer applies for financing at the dealer.
2. The dealer forwards the application to its network of lenders.
3. Lenders evaluate the application and return offers.
4. The buyer selects an offer; the lender funds the loan and services it.

Although the dealer facilitates the application and sale, the legal borrower relationship and loan terms come from the financing institution—not the dealer. Dealers may earn fees or markups, which can make dealership financing more expensive than loans obtained directly from banks or credit unions.

How indirect loans work in the secondary market

When a lender sells a loan (or a pool of loans) to another institution or investor, the buyer becomes responsible for administering the loan and collecting payments. Secondary-market activity supports liquidity for lenders and helps manage risk, but it can change who services the loan and where payments are sent. Agencies such as Fannie Mae and Freddie Mac buy mortgage loans from lenders, package them, and resell them to create broader funding availability.

Examples

• Auto dealership financing where the dealer submits a buyer’s application to multiple banks or finance companies.
• A bank that originates consumer loans or mortgages and later sells them (individually or in pools) to investors or government-sponsored enterprises.

Pros and cons

Pros:
* Convenience—apply and complete financing at the point of sale.
* Broader access—dealers’ lender networks may approve borrowers who struggle to get direct loans.

Cons:
* Higher cost—rates and fees may be higher than direct loans.
Less transparency—dealer markups or contract clauses can be overlooked.
Possible contract risk—if the dealer can’t assign the loan, contracts sometimes include rescission windows.

What to watch for and tips

• Shop rates before visiting the dealer—get prequalified offers from banks and credit unions to compare.
• Negotiate the vehicle price separately from financing terms.
• Read the contract carefully for clauses about loan assignment, rescission windows, and dealer rights if the loan isn’t sold.
• If a dealer asks you to sign another contract on worse terms after a loan falls through, you are not obligated to accept it.
• Consider your credit profile—indirect loans can be a viable option for borrowers with lower credit scores, but understand the higher cost.

Summary

Indirect loans provide a convenient path to financing through intermediaries such as dealers or via loans traded on secondary markets. They increase access to credit but often at a higher cost and with potential contract complexities. Compare direct lending options, read contracts carefully, and understand who the actual lender will be before agreeing to financing.