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What Is Dealer Financing And How Does It Work?

A recent report published in The Financial Express reveals that while the lending market experienced a slowdown in 2020, it is well on the path of recovery in 2021. Apart from direct lending, other types of external financing solutions are also gaining traction and contributing to this increase in total credit uptake.

For instance, dealer financing has slowly emerged as a viable funding avenue, which has not just allowed borrowers to access funds easily from retailers but enabled the latter to profit from the entire proposition. This has been possible with the emergence of various dealer distributor financing platforms. In this regard, individuals willing to establish a dealer distributor network can easily access unsecured financial help from MANDII.

Read on to know the intricate details about dealer financing and how it functions.

Dealer Financing - An Introduction

Dealer financing is a type of credit facility wherein the funds are issued by a retailer to its customers. This loan is then sold back to a bank or third-party institution. Financial institutions or banks buy this loan from dealers at a discount. Once the loan is sold off by the retailer, the bank or the lending financial institution becomes the sole collector of principal and interest from borrowers.

Important Facts About Dealer Financing:

Take a look at these pointers to gain an insight into how a car dealer finance works –

  • Dealer financing, a form of indirect loan, enables borrowers to obtain funding via the help of an intermediary.
  • The interest rate third party financial institutions authorise or quote to dealers are termed buy rate. However, dealers can set the interest rate higher while providing loans to their customers.
  • Dealer financing usually targets borrowers facing difficulty in securing loans directly from traditional lenders, owing to factors like poor credit score, stringent eligibility norms, etc.

Understanding Dealer Financing:

Dealers who manage high-priced items often work with various third-party lenders. Together with these third-party lenders, dealers help borrowers/customers to obtain instalment financing to purchase these items.

Usually, dealers work with several financial institutions willing to extend their support to boost their sales. Due to this extensive network of lenders, dealers often have the power to get credit approval from third-party financial institutions or banks for customers who would not otherwise qualify to avail the loan.

While these are the basic fundamentals of dealer financing, it is also crucial to know how the entire facility works in general and in the secondary market.

How Does Dealer Financing Work?

Since this financing option involves three parties, there are different steps to how it functions.

In dealer financing, a borrower or customer first submits a credit application to dealers. Next, the dealer circulates the customer’s credit application alongside other requisite documents within his/her lending network.

Here, borrowers are offered multiple options from which they can choose lenders as per their feasibility. They can compare various lenders and tally charges and internal policies, and select the best one per their convenience and need.

By extending financial aid to borrowers who otherwise would not be able to avail credits on their own, a dealer also stands to benefit substantially. Since dealers make the process of obtaining funding easier and simpler, they consequently increase their sales.

With dealer financing, a retailer’s financial network provides loans based on a borrower’s credit profile. On top of that, it is the third-party financial institution or bank that determines all related terms, rates and collects the payments from borrowers.

As stated earlier, lenders quote an interest rate known as the buy rate to the dealer to finance a loan. However, since dealers are under no obligation to offer the best interest rate to customers, the rates can touch a higher percentage in most cases.

Further, with this financing option, loans are extended to often high-risk customers. In such cases, the interest rate can also go higher. Dealers can claim the sold products/items from borrowers if they miss any payment.

Dealer Financing (Indirect Loans) In Secondary Market:

With indirect loans, lenders (in this case, the dealers) do not directly generate the credits. They are, thus, not liable to collect the interest payment from borrowers. Here, all the responsibility shifts to the entity to whom the loan is sold off, who then shoulders the burden of administering and collecting the interest payment. Borrowers must read the documents or agreement carefully before opting for dealer financing.

Dealer financing enables borrowers to avail a loan from a bank or third-party lender, which, in turn, improves the sale in the dealer business. To establish and run such a business efficiently, enterprises can now opt for dealer distributor financing from MANDII.

FAQs on Dealer Financing:

A. No, the ‘buy rate’ of a financial institution can never be lower than the rate offered by a dealer to its customer.