Building Your Loan Portfolio: How Indirect Lending Can Play a Key Factor

By: Web Finance Direct

The ever-changing lending environment presents a number of challenges to banks and credit unions. When establishing and managing your vehicle loan portfolio, it is critical to maintain the proper balance. This will not only help you increase your bottom line, but improve your client retention and relationships as well. That is where indirect lending comes into play. Over time, indirect lending can become a very profitable part of your lending portfolio because it helps you gain access to a large and motivated base of borrowers.

In this article, you’ll learn about indirect lending, its key benefits, and how it can lead to loan growth and increase your loan portfolio’s overall profit margins.

What is Indirect Lending?

Let’s start with the basics. Simply put, indirect lending is a partnership between a lender and an intermediary that sells loans on the lender’s behalf. Typically a dealership or similar retail location, the intermediary can help grow your loan portfolio through its developed customer base. When a borrower decides they want to make a purchase, you’ll be able to work with the dealership to offer them a loan that is mutually beneficial to each party.

While the approval process works much the same as a direct loan, a key difference is how borrowers choose their loans. Once they find the right car to purchase, the prospective borrower submits a credit application through the dealership, which is then sent out to their financing network. If approved, the borrower will receive a number of offers to choose from. From the consumer standpoint, this can help reduce the overall stress of making an auto purchase.

As more borrowers begin agreeing to your offers, you’ll develop better relationships with the dealerships and will begin to see a more profitable and well-rounded loan portfolio.

Benefits of Indirect Lending for Dealers

We just mentioned developing better relationships with dealerships, but the benefits of indirect lending go a lot further for both lenders and dealers. Let’s look at how indirect lending can impact your business in a positive way.

Expanded Consumer Base

This is the big one. As mentioned previously, indirect lending can give you access to a much wider borrower base. This presents a major opportunity for lenders looking to expand their loan portfolio. The indirect lending process can allow those with a less ideal credit history to get loans they wouldn’t otherwise be able to receive if they went to a bank or credit union directly.

Improved Client Retention

Purchasing a new or used vehicle is a major financial commitment, so it is critical for buyers that they are able to get loans that best suit their current financial needs. By offering more flexible loan options, you could begin to see a happier client base that is more likely to seek out your services again in the future. 

Indirect Lending Can Help Dealers Remain Competitive

A big part of the growth we’ve seen in indirect lending is that it can help dealerships remain competitive in today’s market. Flexibility continues to be a driving force, especially with the recent challenges put forth by inflation, supply chain fluctuations, and interest rates. The more competitive a dealership is, the better your chances are at selling vehicles.

While this benefit may seem to be one-sided towards the dealerships, the long-term effects also filter through to the lenders. If you’re a part of a thriving dealership’s finance network, odds are you’ll see increased interest in your bank or credit union’s services, which could lead to loan growth and more customer or members.

Managing Your Loan Portfolio

We’ve discussed indirect lending and its key benefits, so let’s briefly shift our focus to management. The COVID-19 pandemic presented the financial world with many challenges. For all the challenges, however, the last few years have also opened up a world of new and exciting possibilities. A big part of any initiative to offer indirect lending includes proper loan portfolio management and planning.

Target Your Desired Markets and Industries 

Yes, indirect financing can help drive profits and reduce costs. It is important to remember that volume is not the only answer, though. Growing your lending portfolio too quickly can have negative impacts in the long term. This is why it is good practice to first identify and develop your target markets and industries.

While a higher number of applications may seem like a good thing, taking the time to set a plan for your lending services can help reduce the time you spend reviewing applications. If you target the right markets, you could see a higher volume of approvals and bring in more business.

Assess Risk

Following up on the first step of researching your desired markets, assessing risk is a big step toward building your desired loan portfolio. It is one thing to sell a lot of loans, but another entirely to sell a lot of loans to the wrong borrowers. Because of this, it is crucial to make sure you are not expanding your services too quickly.

Improper loan portfolio management could lead to credit, liquidity, and reputational risks. So, while it can initially be a time-consuming process, making sure you are thoughtful in setting the right boundaries can help you target the right borrowers over time and maximize your profits.

Unlock Your True Potential

For lenders that have done the research and decided to enter the indirect financing world, it’s all about having the right partners. Ready to add a new indirect lending program or optimize your existing one? Web Finance Direct’s carefully-selected dealer network can help expand your footprint across a number of industries–including auto, boats, and powersports–with virtually no risk. 

We’re ready to help take your loan portfolio to the next level. At Web Finance Direct, we’ll help you hit your targets and optimize your specific loan strategy. Connect with us to learn more!