For lenders like credit unions and banks, a well-run indirect lending program can make a major difference in their ability to connect with qualified applicants. It is one of the best lending solutions for credit unions and banks alike. Compared to direct lending, where borrowers go directly to their bank or credit union to receive a loan, indirect lending allows those making large purchases to connect with multiple lenders at one time, making the process more streamlined for all parties.
“Indirect lending refers to a process where an individual obtains a loan through a third party, typically a car dealership, rather than directly from a traditional bank or credit union,” says Andrea Silvers, Vice President of Lender Relations at Web Finance Direct. “In this arrangement, the dealership acts as an intermediary between the borrower and the financial institution that provides the loan.”
So, how can banks and credit unions successfully establish an indirect lending program? In this blog, we’ll break down the five most important steps to establishing an indirect lending program, how to mitigate risk, and ultimately how to maintain meaningful relationships with dealers.
Five Steps to Starting an Indirect Lending Program
So, your bank or credit union has decided to establish an indirect lending program? What comes next? For Silvers, it’s all about efficiency.
“A successful indirect lending program involves various key components that work together to create a streamlined and efficient process for providing loans through third-party partners,” she says. “These components help ensure that the program benefits both the lender and the borrowers, while also minimizing risks.”
Step One: Find a Trusted Indirect Lending Partner
Before your bank or credit union can effectively run an indirect lending program, you’ll need to find a trusted partner like Web Finance Direct to help connect you to dealerships across the auto, RV, marine, and powersport industries. Once your financial institution becomes part of the partner’s network, you’ll be able to start offering loans to qualified applicants.
Step Two: Define Your Lending Criteria
Before you begin offering loans to borrowers, it is important to establish a well-defined lending criteria that outlines your eligibility requirements. Why is this important?
“This helps in assessing creditworthiness and ensures that loans are provided to individuals who are capable of repaying them,” Silvers says.
By setting your standards, your indirect lending partner will more easily be able to find the right applicants at the right time.
Step Three: Establish and Maintain Relationships with Dealers
Forming strong connections with dealerships can help your bank or credit union develop consistent lending pipelines to grow your network and offer more loans to those who meet your lending criteria.
Better yet, the better your relationship with a dealership, the more competitive they will become in the marketplace. Because many of today’s consumers are looking for financial flexibility, indirect lending is beneficial to all parties.
Step Four: Offer Competitive Loan Terms
A big part of running a successful indirect lending program is the ability to give new members competitive rates, according to Silvers.
“By offering members competitive loan terms, interest rates, and fees, you could attract more borrowers through your indirect lending partners,” she says. “This makes your lending program an appealing option for potential borrowers.”
On top of competitive rates, be sure you maintain transparent and open communication with potential borrowers about the expectations, processes, and responsibilities for fostering a mutually beneficial relationship.
Step Five: Monitor and Analyze Your Performance Over Time
Any successful indirect lending program will include a thorough, continuous review of performance through key performance indicators (KPIs) and analytics. This helps identify areas for improvement to optimize your overall effectiveness, ideally helping your bank or credit union attract more members down the line.
How to Mitigate Risk While Indirect Lending
For all of its benefits, an indirect lending program can present some risks, including the rising threat of fraud. Fortunately, though, there are steps credit unions and banks can take to mitigate the risks of indirect lending.
“Given the nature of indirect lending programs, there are several risk management strategies that are essential to ensure the safety and soundness of the lending institution,” says Silvers.
Credit Monitoring and Reporting
By carefully analyzing the creditworthiness of your potential borrowers, your bank or credit union can ensure you connect with those who are the most likely to pay back their loans. Today, many are turning to technologies like AI to help simplify the process.
Due Diligence and Selection of Partners
By thoroughly assessing your partners (dealerships, service providers, etc.) on their reputation and trustworthiness, your bank or credit union can pave the way for a more streamlined indirect lending experience. At Web Finance Direct, we do the hard work of vetting the dealerships we work with so your financial institutions can enjoy a stress-free experience.
Portfolio Diversification
By offering loans in more industries than one, indirect lending programs can help you minimize the impact of localized economic downturns.
Establish Your Indirect Lending Program with Web Finance Direct
Is your bank or credit union looking for the perfect lending solution? By joining our network of lenders, you’ll get access to a wide range of highly qualified dealerships and applicants across multiple industries. To get started, contact Andrea Silvers, Vice President of Lender Relations.
FAQs
How does indirect auto lending work?
An indirect auto lending program connects applicants to lenders through an intermediary, such as a dealership. This allows borrowers to receive multiple loan offers for their purchase.
How can credit unions and lenders establish effective partnerships for indirect lending?
To establish long-lasting relationships with indirect lending partners and dealerships, lenders should offer fast communication, efficient loan processing, and flexibility.
What are the key components of a successful indirect lending program?
While a lot goes into maintaining a successful indirect lending program, some of the key components include competitive loan rates, transparent and fast communication, and data security.
How can credit unions and lenders manage risk in an indirect lending program?
There are many ways to manage the risks of indirect lending, including careful reviews of an applicant’s creditworthiness, due diligence when selecting dealerships to work with, and technological advancements like lending software and AI.