The most common method of buying a car is borrowing the money and then paying it off in installments. Over 85% of new cars and half of used cars are financed
The most common method of buying a car is borrowing the money and then paying it off in installments. Over 85% of new cars and half of used cars are financed. Car loans are direct and indirect.
DIRECT CAR LOANS
A direct loan is one that the borrower arranges with a lender directly.
INDIRECT CAR LOANS
Indirect loan is arranged by the car dealership where the car is purchased. Legally, an indirect “loan” is not technically a loan. When a car buyer obtains financing facilitated by a dealership, the buyer and dealer sign a Retail Installment Sales Contract rather than a loan agreement. The dealer then typically sells or assigns that contract to a bank, credit union, or other financial institution. Usually, the dealer knows in advance which financial institution will buy the contract. The borrower then pays off the financial institution the same way as for a direct loan.
Typically, the indirect auto lender will set an interest rate, known as the “buy rate” The auto dealer then adds a mark-up to that rate, and presents the result to the customer as the “contract rate“. These mark-ups have been the focus of some regulatory scrutiny because they can cause variations in interest rates that are not correlated with credit risk.