Does Indirect Lending Have a Future?

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(Last Updated On: April 27, 2022)

When did your credit union launch its indirect auto lending program? Many large institutions began theirs in the 1990s. They weren’t without challenges. The sector experienced only moderate growth until 2012, when a major shift occurred.

Major bank lenders, after suffering losses exaggerated by the impacts of the Great Recession, pulled away from the indirect channel. This opened a door for credit unions to take over their business. What totaled $100B in 2012 grew to nearly $400B by the end of 2019.

Credit unions attracted members and grew lending volume at a massive rate. All the important risk metrics remained within safe measures. So how could there be a problem?

Changing behaviors, consumer expectations, and a focus on financial empowerment (in pursuit of the credit union mission) are clashing against a now-engrained practice within the industry.

The Car Buyer’s Journey


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Discover how your credit union fits into the journey…beyond just the loan. Watch the recording of our Car Buyer’s Journey Webinar.


How do people (your members included) go about buying a car? Three stages:

  • Awareness: Need for a new car
  • Consideration: Research models and budget
  • Decision: Buying the car

Until 2020, this process averaged 115 days from start to finish. Barely 1 in 5 consumers did any research on financing throughout, only looking into it in the last two weeks (Consideration stage). Consumers prioritized pricing over interest rates when considering costs.

Financing where you bought was also just easier and more convenient.

Chalk this up to one more thing the pandemic upended (and sped up existing transitions). The car buying journey dropped to only 89 days, according to Cox Automotive. Nearly 90% of those researching online embraced 3rd party car buying websites.

This came at the expense of reduced dealership activity. While physical visits grew in 2021 and 2022, there is now a consumer desire to handle more of the purchase online ahead of delivery. Financing, too, earned greater attention from buyers.

Financing No Longer an Afterthought

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Your notes don’t have to be this detailed. Or made of paper.

The Cox Automotive 2021 Car Buyer Financing Journey showed 87% of buyers researched financing prior to purchase. 78% of Gen Z and Millennials were willing to sign contracts online, having started their research more than 30 days before purchase.

CarGurus found that 93% of those surveyed felt that being pre-qualified for a loan would help as they searched for a good deal on a new ride. If only a credit union had that capability, and could know when their members were looking early in the process.

Are we seeing the end of doing it all at the dealership? “One-stop shopping” still offers value for some, but today, more people arrive at dealers with at least some awareness of their financing options. Often, these are better deals than the indirect offer.

Early Warning Signs

Indirect lending growth has been on a slowdown since well before the pandemic, seen first in 2017. Credit unions leaning towards direct auto loan acquisition showed stronger growth than indirect-focused lenders.

There’s also concern about an imbalance in lending success. 84% of all credit union auto loan business is generated by approximately 1500 credit unions offering indirect. Overall, penetration has dipped to 20%, down from 20.8% of auto loans industry-wide, as of Q1 2021.

Changing Expectations & Evolving Dealers

People at Car Dealership
She’s got the info right there.

Recent trends show a shift towards self-sufficiency and empowerment from buyers. Do you believe they’ll go back to trusting dealers and accepting their financing options?

Industry experts, and us, too, believe those days are fading. Consumers, your members included, will embrace the tech and resources available to find the best deal on both the car and financing. Contactless transactions will grow, taking over more of the in-person process.

Instant access to information will become the new normal.

How can indirect lending survive in this reality?

Dealers Will Find a Way

F&I is an essential component to dealership gross income, both on new and used vehicles. In 2020, AutoNation, the largest dealer group in the US, reported over $1B in F&I revenues. That same year, dealers nationwide grew F&I revenue 4.5% YOY.

Whether it’s GAP, extended service contracts, debt protection, or other services in their “menu”, dealers achieve incredible penetration rates, nearly 90% on new and 73% for used. Depending on the dealer, that could be upwards of $3,000 generated per vehicle.

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Positioning & Hybrid Setups

Do you believe dealers will just let technology take that away? Of course not. They’re planning for a digital-first future, along with the “way they’ve always done it”.

Our prediction: Dealers position themselves as the best choice for a convenient and personalized car buying experience. They’ll promote immediate pricing and loan approval, along with the convenience of meeting your car in the same place (even if part is on an app).

You’ll see hybrid setups, which integrate the remote aspects of Carvana, while sharing the menu of ancillary services right in the app (where you can sign for the car and the loan quickly).

In other words, dealers will ensure indirect remains a profitable option. Besides, they’re protected by a range of state regulations to avoid competition (ie. Why Tesla can’t sell directly in all states). With $10B in F&I revenues at stake, they’ll fight to keep it going.

Of course, your credit union has options. Indirect lending isn’t necessary for your survival. And with the shift towards more financing awareness, you can leverage tools to empower members and enhance your bottom line, all while fulfilling the credit union mission.

Indirect Lending & Your Mission

Man and Woman in Office
It’s about guiding your members, whether in person or remotely.

“When one door closes, another opens.” Indirect lending will continue into the foreseeable future; yes, we took on Betteridge’s law of headlines and emerged as expected. Perhaps a better title would be: “Should Indirect Lending Have a Future At Credit Unions?” 

As more members (especially those in age groups the industry traditionally struggles to reach) seek out financing options and pre-approvals online before purchasing, it’s necessary to ask: Why indirect?

As your credit union adopts tools to provide members with easy and convenient auto shopping along with blink-and-you-missed-it fast loan applications on any device, again you can ask: Why indirect?

With dealer reserve fees decreasing credit union margins by 1-3%: Why indirect?

Finally, what drives us: You exist to improve and empower your members’ financial lives. Part of that is educating on protection products, helping avoid unexpected costs and negative financial spirals. You can’t do that crucial part on an indirect loan.

And even worse, when dealers sell protection products to your members, they’re doing so at much higher rates with far less consultation. Your credit union loses income opportunities and members don’t get the financial empowerment you exist to provide.

So, why indirect?

Read our answer to that question. Then be sure to Subscribe to the Learning Library so you can keep education and mission top of mind…and top of inbox!

Joe Winn - CU Geek

Blogger. Speaker. Part-time Jedi.

Focused on helping your bank or credit union grow in the face of emerging challenges.