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 a collateral. The borrowers then pay back the interest on mutually agreed conditions.
Dealer financing is a type of loan that is 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 which purchases these loans at a discount. The bank then collects the principle as well as the interest from the borrowers.
The interest rate that the financial institution quotes to the dealer is called 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.
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 under an obligation to offer the best available interest rate, they take the liberty to set higher rates. The dealer may choose to own the loan rather than transferring to another entity.
By advancing a loan to the customers at the dealership, the auo 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 by passing the customers information to the financial institution that it has a prior arrangement with.
Dealer financing can reduce the cost of securing a loan and also help them get it in a shorter time owing to the arrangement between a dealer and the financial institution. Auto dealers generally offer these loans to customers who may not be able to secure a loan from a bank themselves. This could be due to a variety of reasons such as a low credit score.
Sometimes the dealers give out loans to high risk customers. The interest rates may be higher for such loans. In such cases, the dealer may install a tracking device or disabling device so as to repossess the vehicle if the customer misses out on payments.
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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.
Other retailers like boat dealers also use dealer financing. This helps the customers access to financing and retailers move the inventories at a faster rate 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.
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. In case the dealer has not sold the loan, it may cancel the contract within a specified period of time. This will require the buyer to return the car. Post the cancellation of the loan, the buyer is entitled to get back the down payment.
Dealer finance is an indirect loan process which works smoothly for all the parties involved. While the customers can secure a loan even with a lower credit score, the dealer can speed up the sales process. NBFCs and many other banks offer customised Dealer Finance which allows dealers and franchises address business finance requirements smoothly. You can avail dealer finance to ensure smooth functioning of the supply chain by extending financial support whenever required.
At Finserv MARKETS, you can avail attractive business loan of up to Rs. 30 Lakhs to assist dealers manage their cash flow better. Flexible repayment tenures from 12 to 60 months makes it easy and favourable for financing dealerships. 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, with pre-approved offers, your loan application will be approved instantly. You can also check out various loan options suited to your needs on Finserv MARKETS.