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What Is an Indirect Loan?

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  • Written By: Mary McMahon
  • Edited By: Shereen Skola
  • Last Modified Date: 06 November 2018
  • Copyright Protected:
    2003-2018
    Conjecture Corporation
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An indirect loan is facilitated by a dealer acting as a third party who connects the buyer with a lender. Borrowers receive their financing directly at the dealer’s, but the actual lender is another company. This practice is commonly seen with car, home, and furniture loans. Buyers considering this option for a purchase may want to get direct quotes on loan rates to use as a basis for comparison when getting information about an indirect loan.

In a common example of this type of loan, a buyer can walk into a car dealership with the intent to make a purchase. The buyer selects a car and agrees on a price with a sales representative, who offers financing options. This requires filling out some financial paperwork with information about the buyer’s credit history. Dealers may work with several lenders and can check with them all to see which would offer the best terms to the customer. Once they secure financing, they can process the sale transaction for the vehicle.

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Customers may use an indirect loan as a convenience service when they purchase cars, appliances, furniture, and other big ticket items. Rather than having to separately secure a loan and shop for the products they want, they can get the financing in a package deal. These benefits may be offset by less favorable interest rates and terms through an indirect loan. In some cases, borrowers make payments directly to the dealer and may not deal with the lender at all, which can create problems in the event of a dispute about the loan.

For home financing, this option can be used with government assistance programs, where people apply for funding to buy a home and the dealer sells the loan to a third party. Homeowners continue to make their payments directly to the government agency that acted as an intermediary, rather than to the lender. Lenders can also package and resell loans after buying them, in which case the indirect loan may move through several different financial institutions before it is fully paid.

Borrowers are entitled to information about the terms and conditions of a direct loan. The specifics can depend on regional regulations, but may include a disclosure of the interest rate, the length of the repayment process, and how much the borrower can expect to pay over the life of the loan. Servicing information, including contact numbers and an address, must also be made available so borrowers know where to go if they need assistance.

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