DEFINITION of 'Dealer Financing'

Dealer financing is a type of loan that is originated by a retailer to its customers and then sold to a bank or other third-party financial institution. The bank purchases these loans at a discount and then collects principle and interest payments from the borrower. This is also called an indirect loan.

BREAKING DOWN 'Dealer Financing'

A well-known example of dealer financing is auto dealers that offer car purchase financing. Many car dealers mark up the finance company's interest rate and keep the difference as additional profit.

How Retailers Benefit from Dealer Financing

The so-called buy rate is the interest rate that the financial institution quotes to the dealer for the financing. The actual interest rate the dealer offers to the customer, however, can be set higher than what the buy rate is. Dealers are not obligated to offer customers the best available interest rate, which allows them to set higher rates or longer terms on financing. The dealer might own the actual loan rather than transfer it to other parties.

By offering loans at the dealership, an auto retailer may be able to secure the sale of a vehicle more readily than waiting for potential buyers to arrange financing on their own. The dealer will forward the customer’s information to the financial institutions they have finance arrangements with.

While it might be less expensive for the customer to secure their own loan, dealer financing can reduce the time and effort it takes to do so. Auto dealers often market these loans to customers who might not otherwise qualify for financing because of a poor credit rating or other factors. The interest rates may be higher for such loans or other tradeoffs may be incurred. In some instances, dealers who offer such financing to customers who may be considered high-risk might also install devices in the vehicle that will disable it if payments are not received on time or to aid in the finding and repossession of the vehicle if necessary.

Other retailers, such as boat dealers, might offer this type of financing as well. By granting customers access to financing, retailers can increase the likelihood of a purchase and move more inventory. Dealer financing is comparable to credit cards that retailers may offer. The retailer works with a financial institution to provide the financing, but whereas a credit card or a line of credit may be used for a variety of different purchases, a loan is likely to be put in motion for the purchase of a specific item.

RELATED TERMS
  1. Dealer Bank

    Dealers banks are commercial banks, registered with the Municipal ...
  2. Markup

    Markup is the difference between an investment's lowest current ...
  3. Primary Dealer

    A primary dealer is a pre-approved bank, broker/dealer, or other ...
  4. Time-Sale Financing

    A form of indirect dealer lending or financing used by banks ...
  5. Special Finance

    Special finance is a lending option in the auto sales industry ...
  6. Authorized Forex Dealer

    An authorized forex dealer is a regulated company to transact ...
Related Articles
  1. Personal Finance

    Top Tips For Year-End Car Buying

    'Tis the season to purchase new wheels, and these tips will help you drive away with the best price.
  2. Managing Wealth

    5 Tips For Dealing With Car Dealers

    Negotiating with car salesmen becomes a lot easier if you follow these five easy steps.
  3. Investing

    What Is a Broker-Dealer and Why Should You Care?

    Before deciding who to use for help with your investing, learn what brokers, dealers, and broker-dealers are and what services they provide.
  4. Investing

    GM Dealers in India Threaten to Sue Over "Measly" Compensation

    Indian auto dealers are reportedly threatening to sue GM if the company doesn’t offer more to compensate for no longer selling vehicles in the country.
  5. Personal Finance

    How to Get the Best Price on a New Car

    Learn tips to help you get the best price on a new car without the hassle of haggling.
  6. Tech

    New Ways to Buy a Car Online

    Buying a car online can streamline the process and eliminate the stress of haggling with dealers, but the process is not risk-free.
  7. Personal Finance

    What is Costco’s Auto Program? (COST)

    A look at Costco's somewhat unknown Auto Program.
  8. Managing Wealth

    When Are Personal Loans a Good Idea?

    You never want to borrow money for frivolous reasons, but these five circumstances might warrant it.
RELATED FAQS
  1. Does Advertisers provide good financing?

    Making use of seller financing means that you're buying on credit. The seller is essentially loaning you the funds to buy ... Read Answer >>
  2. What is finance?

    Finance is the study of how money is managed and the process of acquiring needed funds. Personal finance, corporate finance ... Read Answer >>
  3. What are the benefits for a company using equity financing vs. debt financing?

    Learn what some of the principal advantages are for a company that chooses to utilize equity financing in preference to debt ... Read Answer >>
Trading Center