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Direct vs. Indirect Financing for Auto Loans: How to Choose

Direct vs Indirect Financing for Auto Loans
Kelly Boyer Sagert
Kelly Boyer SagertUpdated January 4, 2023
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When you’re applying for an auto loan, one choice among many you’ll have to make is between direct vs. indirect finance. Both will get you to the same place — funding for your automobile purchase — but there are key differences between direct and indirect finance to keep in mind. With a direct auto loan, you can apply prior to shopping and research numerous loan options to find the most competitive terms. An indirect auto loan, on the other hand, can help you get a loan faster since you’re working with a third party to arrange the financing. Whether direct vs. indirect finance is right for you ultimately depends on your preferences and priorities.

What Are Indirect Auto Loans?

An indirect auto loan is a type of auto loan where the funds are obtained through a third party. With an indirect auto loan, the lender and the borrower don’t have a direct relationship because there’s an intermediary involved in arranging the financing.Indirect loans are common in the auto industry. For example, when a dealership helps a buyer to obtain financing through lenders in their network, that’s an indirect form of financing.

What Are Direct Auto Loans?

With direct financing, as the name suggests, the borrower goes directly to a lender to get funds. This could be at a bank, credit union, or online lender. With a direct auto loan, you’d go to a dealership to choose a vehicle and sign purchasing paperwork, and then separately get your loan from a financial institution of choice.

Direct vs. Indirect Auto Loan Financing

In many ways, these two types of auto loans are similar, but there are key differences.

How They’re Similar

With both direct and indirect auto loans, you’ll pick out a vehicle and obtain a loan to buy the car. In each scenario, you may have loan program choices to make.The dealership, for example, may offer you a few indirect loan options to consider from different partners in their lending network. There can be indirect used auto loans available as well as those for new vehicles.Similarly, lenders can offer more than one loan program for a borrower’s consideration. With direct financing, you also have choices between lenders to mull over as you gather information from more than one lender to decide what’s best. Programs are typically available for both new and used cars with direct loans as well. In both cases, you’ll usually need to make a down payment, either in cash or through a trade-in. You’ll have a principal and interest payment that’s calculated based on the loan amount, interest rate, and loan term. For both loan types, you’d sign loan paperwork and make monthly payments until the loan is paid off, or until you sell or trade in the vehicle.

How They’re Different

With an indirect loan, you’d discuss and obtain financing at the dealership through a lender in their network once you’d selected a vehicle. Meanwhile, with a direct loan, you’d go car shopping as well as car loan shoppingIn other words, with an indirect auto loan, you’d look into financing after you’ve found the car you want from that particular dealership. With a direct auto loan, you could seek financing from a lender either before or after selecting a vehicle, giving you the option to consult with a lender ahead of time to get preapproved. However, you’ll also need to be better versed in auto loan terminology and specifics to look out for.

Direct Finance Pros and Cons

Pros of direct financing include the following:
  • You can shop around for rates and terms, choosing what’s right for you from your lender of choice.
  • In some cases, a dealer will mark up the interest rate charged; with direct financing, there’s no intermediary to potentially do that.
  • You are more in control. For example, you can decide how many lenders to consult with and can therefore manage how many times your credit is checked.
Meanwhile, the cons of direct financing include:
  • You shop at a dealership and also need to talk to one or more lenders, which is more time-consuming than handling everything in one location. 
  • If multiple lenders check your credit, this could impact your credit score.
  • You’ll need to do the legwork of researching on your own, rather than relying on the dealership finance department’s network of lenders.

Indirect Finance Pros and Cons

As with direct finance, there are both pros and cons to indirect auto loans. Notable upsides include the following:
  • You won’t have to research and check in with multiple lenders, which will save you time.
  • The dealership will coordinate the process, making it more seamless for you.
  • The dealer’s finance department can run your credit for different lenders on the same day, helping to ensure those get counted as only one hard inquiry on your credit.
However, you’ll want to note these downsides as well:
  • A dealer could bump up the interest rate, making it more expensive for the borrower.
  • The dealer is more in control of the process than with a direct loan.
  • You won’t have the opportunity to shop around to compare multiple loan offers.

Is Private Lender Refinancing a Direct or Indirect Loan?

At some point, you may decide to refinance your car loan, perhaps to try to get a better interest rate or to switch lenders. When you refinance with a private lender, you’re dealing directly with the lender without an intermediary, making it a direct refinance loan. Because you’re financing a vehicle with the title already in your name, you wouldn’t be working with a dealer as you would with an indirect loan.Recommended: Auto Loan Refinancing Tips

The Takeaway

When buying a vehicle, you’ll either need to pay cash or, as is common, apply for an auto loan. A borrower may choose to work with a dealership to get financing through one of the lenders in their network. This is an indirect auto loan. Or, they may get a direct auto loan, where they work directly with a financial institution without a middle party.If you’re ready to refinance an auto loan, you can fill out a short application at Lantern by SoFi to receive multiple offers from lenders in our network. Checking rates comes with no application fee, and there is no obligation to move forward. Our network contains trusted lenders with competitive rates.Let us do the heavy lifting for you with Lantern’s auto refinance tool.

Frequently Asked Questions

What is indirect financing for auto loans?
What is direct financing for auto loans?
What is the difference between indirect and direct financing for auto loans?
Photo credit: iStock/mixetto

About the Author

Kelly Boyer Sagert

Kelly Boyer Sagert

Kelly Boyer Sagert is an Emmy Award-nominated writer with decades of professional writing experience. As she was getting her writing career off the ground, she spent several years working at a savings and loan institution, working in the following departments: savings, loans, IRAs, and auditing. She has published thousands of pieces online and in print.
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