Indirect auto loans: What are they and are they a good idea?

Written by

Bankrate,

Edited by

Pippin Wilbers,

Reviewed by

Mark Kantrowitz,

Expert verified

Published on December 11, 2023 | 3 min read

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Car salesman shaking hands with customers sitting across the table from him

Key takeaways

Indirect auto financing involves a lender providing financing to the vehicle seller instead of directly to the buyer.
This type of financing can be convenient as it allows you to shop and secure financing in one place, but it can also come with higher interest rates compared to direct loans.
It's important to shop around and compare offers before committing to indirect auto financing, as there may be better deals available elsewhere.

Indirect auto financing is when a lender provides financing to the vehicle seller instead of directly to the buyer. The seller then passes the financing along to the buyer, and the buyer makes regular monthly payments to the lender the dealer connects you with in order to pay off the loan.

This approach to vehicle financing comes with benefits and drawbacks so it is important to understand all your options before signing off on an indirect auto loan.

What is indirect auto financing?

Indirect auto financing is available through dealerships from lenders in their partner network. Instead of searching for a loan and getting preapproved before visiting the dealership, you will obtain the financing when you purchase the vehicle.

In turn, the seller collects a commission or other type of payment for connecting you with the lender. This can be in the form of a percentage that’s added to your interest rate.

When you make the final payment, the lender will release the lien or title on the vehicle to you. During the loan term, you will also pay interest on the loan, just as you would with a direct loan.

Other indirect loans

Indirect loans can also refer to the process of using a marketplace or broker. With these options, you enter your personal information and are matched with one or more lenders.

In most instances, your credit score will not be impacted since these online marketplaces only require a soft inquiry. Furthermore, you will be able to view potential loan offers that include the estimated monthly payment, repayment period and interest rate to help you make an informed decision. Before you select one, you’ll also want to compare the total cost of the loans.

Pros and cons of indirect financing

Although indirect auto financing can help you have a more seamless car-buying experience, sometimes it makes more sense to finance through a dealership.

Pros

Shop and buy in one place. It’s often more convenient to buy at the dealership. You’ll be able to shop and secure financing the same day.
Less legwork. Though it is still a good idea to get outside quotes, it is not strictly necessary. If you want, you can go in without applying with other lenders before choosing your car.
Bad credit options available. Specialty dealers offer options for buyers with less-than-perfect credit.

Cons

Higher rates. The dealership often adds a percentage on top of what is offered by lenders that match your needs. This means that you will likely get a better interest rate with a direct lender.
Not as much control. You don’t get to choose which lender your information is shopped around with. If you already work with a bank or credit union, it can be beneficial to apply with it — you may get a better rate or terms than you would otherwise.
Unavailable for some purchase types. If you’re looking to buy from a private owner, indirect financing will obviously not be an option.

How to obtain indirect auto financing

The steps to obtaining indirect auto financing are straightforward. But before you apply, be sure to gather any documents the dealer will need to submit to the lenders in their network. Here’s a step-by-step breakdown of how to move forward:

Visit the dealership.
Shop around and choose your car.
Apply for a loan at the dealership.
Get approved and choose the best offer.
Sign your loan documents.
Take possession of your new vehicle.

Alternatives to indirect auto financing

If you don’t want to get an indirect auto loan through a dealership, there are several other options for financing your future vehicle.

Most banks offer loans for vehicles, although it can be a more involved process. If you have good credit, a bank could be the way to go. But if you have bad credit, this might not be the most viable option.
Credit unions operate much like banks, but members of the credit union are the primary focus rather than investors. You will likely need to become a member of the credit union, and the membership requirements will vary from one to the next. But joining a credit union that provides auto loans can save you money and offers more flexibility.
Using an online lender is another option for financing a car without going through a dealership. Many online lenders focus on offering low rates and reasonable loan terms, rather than the hefty commissions you might find at a traditional dealership.

The bottom line

Indirect auto financing is a convenient solution to help you purchase your next ride. However, it’s important that you shop around before visiting the dealership as there could be a better deal elsewhere. You may also find that the dealer is willing to match or beat an outside loan offer to earn your business.