The Web Finance Direct Guide to Indirect Lending
By: Web Finance Direct
Throughout the American economy, financing continues to play a major role. For many consumers, the ability to borrow money to pay for their purchases over time gives them the flexibility they need, especially when it comes to more expensive, big-ticket items like cars, RVs, and boats. Take the RV industry, for example. As of 2021, 276,838 indirect loans are being paid off by consumers, totaling $13 billion in funds. For both indirect lenders and dealerships, this style of financing has a lot of benefits compared to direct lending, including a wider borrower base and higher profit margins. Indirect auto loans involve a partnership between three parties instead of two: the borrower, the lender, and an intermediary like Web Finance Direct which connects the two on the indirect lender’s behalf. While lenders do not share a direct relationship with the borrowers, this financing style allows borrowers who may not originally qualify for direct loans to be approved for funds they need to make a purchase.
In this guide, we’ll discuss the key differences between indirect and direct lending, the benefits of each, and why working with Web Finance Direct is the right choice for indirect lenders looking to grow their business with virtually no risk.
Direct vs. Indirect Loans: Defining the Difference
To start, let’s dive into the ins and outs of indirect and direct lending. These are two of the more popular financing styles available to consumers today. So, what makes each different? And what are some of the pros and cons?
What is Indirect Lending?
Indirect lending, also known as wholesale or correspondent lending, refers to a lending style in which dealerships or retail locations sell loans on behalf of banks and credit unions. You may hear it referred to as a wholesale loan or correspondent loan as these terms describe the transaction in short. One party—or wholesaler—sells the loans at their original price to another party—or correspondent. Because direct loans can be harder to qualify for, many consumers, some with less desirable credit scores, turn to indirect loans. Once they’ve decided what to purchase, they fill out an application through their dealership, which will turn to its F&I service partner’s network of lenders to connect the potential buyer with several loan providers and offers. Once the consumer is satisfied with an indirect loan offer they receive, the sale will be finalized and the loan will be paid off in the same way a direct loan would.
Benefits of Indirect Lending
Because indirect lenders don’t share direct relationships with borrowers, indirect lending saves time, as neither party ends up tangled in lengthy contract negotiations and legal agreements. This can allow lenders to sell more loans than they normally would through direct lending or other forms of financing.
Access to More Consumers
As previously mentioned, indirect lending gives lenders the chance to sell loans to a wider group of potential borrowers, such as those with less desirable credit that would not qualify for a direct loan from a major bank or credit union. This is a huge benefit for lenders that are looking to expand their loan portfolio and possibly enter other industries as well, such as powersports or marine.
Lowers Overhead Costs
For both dealerships and indirect lenders, this style of financing lowers overhead costs naturally. Because both work with a third party to sell loans, neither has to spend additional time and money to target borrowers, handle applications, and sell additional back-end services like extended warranties and gap insurance.
For more or less every consumer, buying a car, boat, or RV is not an easy financial commitment. The high numbers and lending process can be stressful for many, but providing excellent service makes everyone’s life easier. Through partnering with a full F&I services company like Web Finance Direct, indirect lenders are able to build better relationships with a larger number of customers, leading to improved client retention and a higher volume of satisfied borrowers.
A More Streamlined Form of Communication
Because the buyers themselves don’t have to act as the middleman in finding a loan offer they can afford, indirect lending results in better communication between all parties. The process of approval is typically faster as well, leaving customers with more time to research the right car to buy so they can be confident in both their new purchase and the indirect loan that’s behind it. Indirect lenders bridge the gap between salespeople and buyers, making the communication process as a whole much simpler for everyone involved.
Dealerships Become More Competitive
While this benefit may seem one-sided towards dealerships, it becomes advantageous to indirect lenders as well in the long term. If your bank or credit union is part of a diverse network of competitive dealerships, chances are you’ll be able to sell more loans. Without offering financing, dealerships would struggle for business in today’s marketplace which is flooded with headlines about supply chain issues and rising costs.
Direct vs. Indirect Loans
Now that we’ve talked about indirect lending and its benefits, let’s discuss direct lending and some of its challenges. Direct lending—as the name suggests—involves banks, credit unions, or other financing providers directly giving loans to borrowers who apply in person or through their website. After or potentially before a borrower has found their desired purchase, they’ll first stop and apply for a loan through their trusted financial institution. This process can be trickier than indirect lending for a number of reasons, including longer approval times and more strict guidelines for approval. As a result, it is less common than indirect lending.
The Approval Process Takes Longer
We’ve hinted at this challenge already. Direct lending can be more time-consuming than offering indirect lending. Why? Where indirect loans can be offered to borrowers and approved in as little as a few minutes, direct loans can take hours—sometimes days. If you’re wondering why this is, put yourself in the shoes of both the borrowers and the lender. For the borrowers, they’ll want to make sure they’re getting the best offer possible. If necessary, they’ll visit multiple banks or credit unions to compare rates—a step that is done quickly through indirect lenders. In addition, the guidelines required for approval may be stricter when dealing with direct lending, meaning many may not end up qualifying for the loans they need to make purchases.
There is More Risk
One of the best things about partnering with Web Finance Direct for full F&I services is that there is virtually no risk. Direct lending, however, adds more pressure on the lenders to not only find qualified applicants but make sure payments are being made on time. It is the responsibility of direct lenders to ensure that borrowers meet their guidelines, meaning the underwriting process is much more complicated. Also, borrowers will need to go through a more rigorous review if they have any blemishes on their credit history. This could spell higher interest rates, stricter loan terms, and even more expensive loans, which eventually could lead to a lower rate of client retention for lenders. Now, the profit margins for direct lending may be higher in the long term, but lenders should understand the increased risk that comes with this financing style.
Limited Consumer Base
Where indirect lenders are able to work with a much wider range of borrowers, the risk associated with direct lending means your borrower base will be limited. This can make it more challenging to meet profit goals. Building your loan portfolio may become harder over time, as fewer loans are sold to borrowers.
How Indirect Lending Works
For those who may not be familiar with the process, let’s break down how indirect loans take shape. The process is very similar to direct lending but involves a few unique steps that makes it much simpler for borrowers. The first difference is that the dealerships submit loan applications for potential borrowers. Customers will typically be guided to a dealership’s loan or existing F&I department to submit the necessary paperwork and choose which loan offer works best for them. Through careful loan processing, which includes a credit report, title and income verifications, and a final review, an indirect loan can be approved and accepted all in one visit. Even better for the borrowers, they’ll be able to drive off the lot with their new purchase immediately after.
Indirect loans are paid off through monthly installments made to the dealership or lender. Dealerships that are able to offer both prime and subprime options tend to perform better with consumers, who’ll enjoy more freedom in their financial decisions. Dealerships can then choose to pass along some of their profits by offering additional services, such as gap insurance and extended warranties that give buyers more peace of mind that their purchase is ready to be enjoyed for years to come.
Partnering with Web Finance Direct
“Our lender/dealer relationship with the Web Finance Direct team has been exceptional. They are knowledgeable, quick to respond and a pleasure to work with. Plus their document packages are speedy, clean, and accurate. It’s been a productive and profitable partnership for us!”
– Craig B., AVP Consumer Lending/Underwriting
Once you’ve decided to become an indirect lender, you’ll need a partner that can truly streamline your financial process. That’s where Web Finance Direct comes in. We serve those in the auto, boat & marine, RV & camper, and powersport industries. We connect lenders with our network of highly qualified dealerships to make selling loans easy for all. Through our proven, robust, and auditable process, we ensure that your institution only receives applicants that meet your requirements, eliminating the risk of direct lending and transforming the way you’re able to find new customers.
There are so many benefits to partnering with a full F&I services company like Web Finance Direct. We give you access to our diverse network of lenders and dealers, are motivated to find you low-risk deals, boast a proven process, and so much more. By helping dealerships and financial institutions provide their customers with a premium lending experience, we’re changing the game for our clients.
What is the difference between direct and indirect lending?
Indirect lenders and direct lenders differ in the way they sell their loans to borrowers. Indirect lending is a partnership between a bank or credit union, dealership, and intermediary, which finds qualified applicants on behalf of the bank or credit union. Direct lending, though, can be riskier because the pressure falls on the banks and credit unions to directly offer their services to borrowers.
What is an example of indirect lending?
A good example of an indirect auto loan would be a customer purchasing a car from a dealership and applying for a loan through the dealership as well. The customer would receive a number of loan offers through the dealership’s network and choose which offer works best for them.
What is the meaning of indirect lending?
Indirect lenders work with intermediaries and dealerships to sell their loans to a wider range of customers. There are many benefits, including a faster approval process for borrowers.
What are the advantages of indirect lending?
Between no risk through Web Finance Direct’s diverse dealership network, a faster approval process, and lower overhead costs, there are many advantages for indirect lenders in today’s market. This process streamlines the communication process and even makes the dealerships themselves more competitive, which has long-term benefits for both the dealers and indirect lenders.
So, what’s next? In this guide, we discussed the many benefits of indirect lending, how it is different to direct lending, and why working with Web Finance Direct is the right choice for those looking to grow their loan portfolio and transform their lending services. Working with Web Finance Direct for indirect lending can help expand loan offerings, improve client retention, and make your business more competitive. Contact us today to learn more and make sure to check out our blog for more context on some of the financial world’s hottest trends.