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.