Indirect Lending for Credit Unions

Credit union members are often fiercely loyal and prefer to do as much business as possible through these nonprofit financial institutions. This can be inconvenient at times, however, as credit unions are typically much smaller than rival for-profit banks. This may mean that credit unions have limited resources or less flexible hours, especially on weekends. Many credit unions participate in indirect lending in order to serve their members conveniently at a single stop, even outside of normal business hours.

What is Indirect Lending?

The most popular form of indirect lending involves a relationship between a credit union and a merchant. The credit union agrees to allow the merchant to originate loans at the merchant's place of business. The most common arrangement involves credit unions partnering with local car dealerships to offer loans from the dealer's lot. Because of this relationship, members can drop by a dealership on a Saturday or Sunday and typically have a loan approved on the same day.

Benefits

Aside from the obvious advantage of member convenience, the credit union also benefits by increasing and diversifying its membership base. While current members often make use of such services, new members can learn about the credit union through the dealership. New members must qualify for membership in order to participate in indirect lending. Most credit unions have either open membership for an entire community or are exclusive based on employment with certain employers or other group memberships.

Who Pays?

Just as the members and the credit union benefit, the question turns to how the dealership benefits. Dealers may receive new or repeat customers based on the fact that they partner with specific local credit unions. In addition, dealers often receive a small commission that is paid by the credit union. There are some organizations that also coordinate the relationship between dealers and credit unions.

Risks

While there may be minimal risks for credit union members using indirect lending, the National Credit Union Administration has identified some potential hazards for credit unions themselves. The NCUA warns that if an indirect lending program becomes popular too quickly and proper controls are not in place, it could increase the risk of the organization's loan portfolio. Potential warning signs of such issues can include delinquencies and inadequate loan documentation.