DEFINITION of 'Indirect Loan'

Any loan that is transferred from a dealer who originated the loan to a third party. Any buyer of indirect loans is known as a holder in due course and is now entitled to receive principal and interest payments.

An example of an indirect loan is a car loan offered to a customer at a dealership which is then purchased by the third party at a discount. In this example, the third party never met the borrower but is now entitled to received payments from the loan.

BREAKING DOWN 'Indirect Loan'

A large percentage of outstanding loans are indirect loans. This is especially true in the mortgage industry, where many lenders package their loans and sell them to governmental agencies such as Fannie Mae and Freddie Mac. Banks and finance companies often purchase installment contracts at a discount from dealers at a discount from the face value of the loans. This allows them to get new customers without actually interviewing the borrower.

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