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A debt incurred by an individual from an entity or another individual is called a loan. The lenders in this transaction could be a financial institution, government, or a corporation, who advance a sum of money to borrowers against collateral. The borrowers then pay back the interest on mutually agreed conditions.

Dealer financing is a type of loan set in motion by a retailer for its customers. It is then sold to other third-party financial institutions or, most often, to a bank that purchases these loans at a discount. The bank then collects the principal and the interest from the borrowers. The interest rate that the financial institution quotes to the dealer is the buy rate. The dealers, however, can set the rate higher while offering a loan to the customers. Such loans are usually offered to customers who might not otherwise qualify for financing because of a poor credit rating or other factors.

How Does Dealer Financing Work?

The buy rate is the interest rate that the bank quotes the dealer. The interest rate that the dealer offers to the customer is usually higher than the buy rate. Since the dealers are not obligated to offer the best available interest rate, they take the liberty to set higher rates. The dealer may own the loan rather than transfer it to another entity.

By advancing a loan to the customers at the dealership, the auto retailer is often better positioned to sell the vehicles than letting the customers fetch a loan by themselves. The dealer makes the whole process quick, bypassing the customers' information to the financial institution with which it has a prior arrangement.

Dealer financing can reduce the cost of securing a loan and help them get it in a shorter time due to the arrangement between a dealer and the financial institution. Auto dealers generally offer these loans to customers who may not secure a loan from a bank themselves. This could be due to various reasons, such as a low credit score.

Sometimes the dealers give out loans to high-risk customers, and the interest rates may be higher for such loans. In such cases, the dealer may install a tracking device or disable the device to repossess the vehicle if the customer misses out on payments.

Advantages of Dealer Financing

Other retailers like boat dealers also use dealer financing. This helps the customers access financing, and retailers move the inventories faster as it increases the likelihood of a purchase. Dealer financing can be compared to the credit cards that retailers may offer. The retailer works with a financial institution to provide the financing, whereas a credit card or a line of credit may be used for different purchases.

Indirect Loan

In the indirect loan application process, dealer financing sees a borrower submit a credit application through the dealership. This application is then sent to financial institutions that the dealer has an arrangement with. The borrower can then go for the best loan for their situation. The dealership also benefits by making a sale which could otherwise be difficult.

Since the interest rate offered by the dealer is often higher than what is offered by banks, it is a good idea to look for buyers to check out other financing options before taking the loan offered by the dealer.

When a lender sells a loan, it is no longer the lender's responsibility to receive interest payments from it. The new owner is then responsible for the collection of interest payments. Therefore the indirect loan contract is advised to be read carefully. If the dealer has not sold the loan, it may cancel the contract within a specified time. This will require the buyer to return the car. Post the loan cancellation, the buyer is entitled to get back the down payment.

Conclusion

Dealer finance is an indirect loan process that works smoothly for all the parties involved. The dealer can speed up the sales process while the customers can secure a loan even with a lower credit score. NBFCs and many other banks offer customised dealer finance, allowing dealers and franchises to address business finance requirements smoothly. You can avail dealer finance to ensure the smooth functioning of the supply chain by extending financial support whenever required.

At Finserv MARKETS, you can avail of attractive business loans of up to Rs. 75 Lakhs to assist dealers in managing their cash flow better. Flexible repayment tenures from 12 to 60 months make financing dealerships easy and favorable. Also, with a unique Flexi Loan facility, you can borrow as per your business needs and prepay when it has extra cash. You can get attractive dealer finance rates which makes your loan affordable. Most importantly, your loan application will be approved instantly with pre-approved offers. You can also check out various loan options suited to your needs on Finserv MARKETS.

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