The ever-changing lending environment presents significant challenges to banks and credit unions. When establishing and managing your vehicle loan portfolio, it is critical to diversify your lending options so you can increase your bottom line and improve your client retention and relationships.
One way to accomplish this is through indirect lending. Indirect auto loans help develop a very profitable part of your lending portfolio by gaining access to a large and motivated base of borrowers.
Read on to learn about indirect auto loans, their key benefits, and how they can lead to loan growth for increased loan portfolio profit margins.
What is Indirect Lending?
Indirect lending is a partnership between a lender and an intermediary that sells loans on the lender’s behalf. The indirect lender is typically a dealership or similar retail location that can help grow your loan portfolio through its developed customer base. When a borrower decides they want to make a purchase, your financial institution can work with the dealership to offer a loan that is mutually beneficial to each party.
While the approval process works much the same as a direct loan, one 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 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 such a large purchase. For financial institutions, better relationships with the dealerships will develop as borrowers say yes to your offers, and your loan portfolio will become more profitable and well-rounded as a result.
Indirect Lending Benefits
In addition to allowing your financial institution to develop better relationships with dealerships, indirect lending benefits are far-reaching for every involved party. Let’s look at how indirect auto loans can impact your business in a positive way.
Expanded Consumer Base
Access to a much wider borrower base through indirect loans presents a major opportunity for lenders looking to expand their loan portfolio. Indirect lending allows 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 buyers must be able to obtain loans that best suit their current financial needs. Offering more flexible options like an indirect auto loan can increase the satisfaction of your client base and increase the likelihood that they will work with you again in the future.
Indirect Lending Can Help Dealers Remain Competitive
Today’s market is challenging, and indirect lending is one way dealerships can stay competitive. Flexibility continues to be a driving force for borrower decisions, especially with the recent challenges of inflation, supply chain fluctuations, and interest rates.
This benefit is more focused on dealerships, but it also creates long-term positive effects for auto loan portfolio buyers. If you’re a part of a thriving dealership’s finance network, you will likely see increased interest in your lending services, which could lead to loan growth and new customers.
Auto Loan Portfolio Management
A big part of any indirect auto loan initiative includes proper auto loan portfolio management and planning.
Target Your Desired Markets and Industries
Offering indirect auto loans can help drive profits and reduce costs, but volume is not the only goal for your lending portfolio. Growing your portfolio too quickly can have negative impacts in the long term. Focus on identifying your target markets and industries, so you can more thoughtfully develop your portfolio over time.
Assess Risk
After researching your desired markets, assess the risk involved in building your loan portfolio. Expand your services at a pace that allows you to both sell loans to the right borrowers and make wise decisions surrounding your indirect auto loan partners.
This risk-assessment process can be time-consuming, but it will prevent you from credit, liquidity, and reputational risks in the long run.
Unlock Your True Potential
Lenders who have done the research know that the indirect financing world is all about having the right partners.
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!
FAQs
How can indirect lending help build an auto loan portfolio?
Indirect auto loans are an efficient and practical way to expand your auto loan portfolio. Borrowers using indirect lending options may be overlooked by traditional lending requirements but are often eager and motivated first-time purchasers. Partnering with an indirect lender gives you access to an entire customer base that would otherwise be missed.
What are some indirect lending benefits?
Indirect auto loans are an efficient and practical way to expand your auto loan portfolio. Borrowers using indirect lending options may be overlooked by traditional lending requirements but are often eager and motivated first-time purchasers. Partnering with an indirect lender gives you access to an entire customer base that would otherwise be missed.
What are auto loan portfolio management best practices?
Take your time making wise decisions surrounding your target customer base, and partner with trustworthy indirect lenders to set yourself up for success in the long run.