8 Benefits of Indirect Lending
By: Web Finance Direct
Whether you’re an RV, auto, or boat dealer, a credit union or bank, or just need help to provide more loan options than you can on your own, indirect lending can help bolster your business in many ways. While this list isn’t exhaustive, these are a few benefits of indirect lending you can enjoy by working with a reputable company like Web Finance Direct.
Indirect Lending Shrinks Overhead Costs
By virtue of its indirect nature, indirect lending lets dealerships keep their costs low while still offering the same services larger competitors can afford. By outsourcing finance and insurance (or F&I) services, a dealer enjoys all the benefits of an in-house F&I department without the overhead associated with it. Despite being a third-party, the indirect lending company handles your financing process the same way as you would internally: a sales rep receives a completed credit application from the client and sends it to the indirect lending company. From there, they match the client with the best lender and sell them products like service contracts and insurance packages that best suit their needs.
You Can Provide Better Customer Service
While the indirect lending company handles your F&I needs, you can focus on what you do best: running your dealership. Moreover, instead of spending money on your own F&I personnel (multiplied by however many locations you have), a single outsourced company can save you exponential expenses by managing credit applications throughout your whole organization.
Indirect lending companies make their money by receiving a percentage of the profits from each successful purchase through your dealership. Therefore, much like a commissioned sales staff, they’re highly incentivized to make sure your deals are approved, finalized, and fulfilled. Between your sales expertise and the indirect lending company’s skills in finding the best financing options for your customers, the symbiotic relationship not only benefits everyone’s bottom lines but most importantly, you can satisfy a wider variety of customers better than you could on your own.
Indirect Lending Lets You Offer Better Rates
On the topic of being able to help more customers, working with an indirect lending company can help you offer better rates to more people. Because of the sheer volume (and the resulting relationships) some of these companies have with their lending partners, they, in turn, can get better competitive rates and quick turnaround on applications.
Though some people believe that by going directly to a bank or credit union might be cheaper — and sometimes it is — this isn’t always true. As Your PF Pro points out:
“After an indirect lending company determines a borrower’s loan rate and sends this information to the dealer, some dealers increase this rate to boost their profit. Understand, however, that some indirect lenders offer better rates than banks and credit unions. So, even if a dealer pads the rate, some borrowers still end up paying less interest (or about the same) than if they had secured direct financing.”
You Can Offer More Options to Customers with Bad Credit
While indirect lending companies can offer better lending rates, they can also give you more options when handling customers with bad or no credit. Because of the volume of lenders they work with, indirect lending companies might have subprime loan packages or even options that don’t require a minimum FICO score. The best part about this is that not only do you get to help more customers across the credit spectrum, but the indirect lenders also streamline the process of finding the best loans at the best rates for them.
FOR CREDIT UNIONS
Indirect Lending Streamlines Communication with Dealers
The benefits of indirect lending aren’t just something to be enjoyed by dealers. Lenders like credit unions and banks as well as the buyers themselves benefit from more direct communication streamlined through the indirect lending company. For example, instead of the buyer acting as a middleman juggling between the salesperson at the dealership and the lending officer at a credit union, the indirect lender bridges that gap for them. This keeps communication simple, from buyer to dealer, and dealer to credit union.
Build Better Relationships While Increasing Loan and Member Volume
As we mentioned earlier, indirect lenders act as intermediaries between a variety of parties. Just as dealers get more options for loans to choose from, credit unions then have more opportunities to connect with dealerships and potential new members through their buyers. Not only can you increase your loan volume, but following up with buyers who use loans through your credit union can translate into new members and account holders who might seek further services.
“Very few [loan applicants], through the indirect channel, become meaningful, long-term [credit union] members. Typically those seeking auto funding are shopping around and looking for the best possible deal. For this reason, it’s unlikely they will turn into lifelong members, or even return to your credit union for another loan. Only 2% to 3% of indirect loan members open another account or take out another loan.”
With that in mind, it’s important to develop strategies that help retain these customers. It isn’t enough to simply be given referral business, but to offer additional value beyond what brought them to you in the first place.
Indirect Lending Can Build Out Your Loan Portfolio and Boost Revenue
Indirect lenders can give your credit union or bank more flexibility in what kinds of loans it offers. For instance, you might not have the staff or expertise to handle loans for RVs or manufactured homes. By partnering with an indirect lending company that is well-versed in this niche, their knowledge becomes yours in addition to connections to dealers selling these products.
By increasing your loan portfolio, not only does your credit union insulate itself from any market changes to a specific niche (i.e. if people start buying fewer cars when auto loans are a staple to your business), but you can take advantage of other changes in consumer spending trends (i.e. for some reason, boat loan volume is skyrocketing yet you don’t have the resources or knowledge to offer them, yet your new indirect lending partner does). All the while, your union is making connections with new dealerships who then bring you more business, allowing you to not only grow your portfolio but the credit union as an organization.
Indirect Lending Supports Community Outreach
Finally, indirect lending can help support your credit union’s community outreach efforts. Take Triad Financial Services’ example:
“In an effort to expand community outreach, credit unions have successfully widened their range of products and services over the past few years. That is due to a combination of factors, including interest rates that continue to hover around low levels and technology advances that allow credit unions to compete with “traditional, for-profit banks” in terms of both product and service offerings. One essential factor is that increasing numbers of credit unions are realizing that community outreach programs deliver far-reaching benefits for all those involved. As an example, three credit unions that continue to enjoy the benefits of their community outreach efforts are Member 1st, Orion FCU and Member One FCU. In addition to being actively involved in the community, these credit unions participate in different indirect lending programs. As a result, they’re able to meet the financial needs of a broader pool of members, while maximizing their lending market shares.“
Especially if your credit union is small with big dreams in supporting its community, an indirect lender can help propel those dreams — and your union with them.