What are indirect auto loans?

Lender to borrower to dealership triangle.
Indirect auto loans are loans that are sold by auto dealers to third parties—like banks—or other types of lenders. Buyers of indirect auto loans are known as "holders in due course." A holder in due course is entitled to receive principal and interest payments from a borrower.

In indirect auto lending a dealer will usually collect information from borrowers and furnish it to banks. Banks can either accept or reject applicants, but they do so without ever coming into contact with applicants. Usually dealers package loans into bundles for purchase to potential holders in due course.

An example of this practice would be a car loan that gets lent to a borrower at a car dealership. This loan would then be sold to a bank or other financial company. The bank, however, would never interview or even meet the borrower who was at the car dealership. But upon purchasing the dealership-originated financing, the bank would own the indirect car loan and thus be entitled to receive all payments that would be made. If the borrower defaults on payments then the bank would also be responsible for pursuing the borrower.

This arrangement is different from direct auto loans, where prospective borrowers would be free to compare loan offers from multiple lenders.

While prospective borrowers would typically spend time searching for direct auto lending on their own, indirect car loans are often lent out by dealerships on the same day that a car is purchased. 

For some borrowers, convenience and time is a priority. By choosing indirect auto lending, borrowers don't have to spend a lot of time searching and applying at different lenders for auto financing. Instead, they can simply walk into an auto dealer and secure indirect auto loans after selecting the car they wish to purchase.

The drawback, however, is that borrowers may end up paying a higher price for this convenient, same-day service.

For those willing to do their homework, obtaining a car loan quote before walking onto a dealership may result in a much better interest rate.