Often, one of the biggest mistakes we see credit unions make in their indirect lending strategy is they try to apply the same methods for direct lending. In reality, however, indirect lending is its own practice with its own techniques and goals, as the table below suggests:
Direct vs Indirect Auto Lending for Credit Unions
| Direct | Indirect | |
|---|---|---|
| Definition | A loan or lease originated directly between the member and the credit union | A loan or lease originated by a member through an auto dealer, often with multiple lenders |
| Pros | Typically have lower interest rates | More convenient |
| Builds lender-member relationship | Typically faster processing | |
| Cons | Slower at point-of-sale | Smaller profit margin – limited by dealer |
| Requires more effort from the member | Higher risk of default | |
| Best For | Building member engagement | Overall growth and dealership presence |
As of Q1 2025, credit unions service 20.6% of total auto financing, an increase of .3% since last year. This number is even higher for used vehicles, which sits at about 28.2%. The market, then, is experiencing slow and steady growth despite economic uncertainties; a promising prospect for credit unions seeking stability in unstable times.
The article below outlines four essential recommendations to improve indirect auto lending for credit unions. In addition, we provide information pertaining to key metrics to track as well as suggestions for credit unions to grow while building member relationships.
How to Improve Indirect Auto Lending for Credit Unions
Since auto dealers are the typical partners involved in indirect lending, credit unions should look closely at how they can benefit from relationships with specific dealerships. Because it is convenient for members to obtain financing directly through a dealership, this offers credit unions a new and more dependable income stream. By improving their indirect auto lending, credit unions can more easily expand their market without noticeably increasing risk.
“By improving their indirect auto lending, credit unions can more easily expand their market without noticeably increasing risk.”
Evaluate Risk Tolerance
The best way to create a mutually beneficial relationship with dealerships is by first evaluating the risks of working with them. In a partnership regarding indirect lending, credit unions need to better understand a dealer’s business, their core clientele, and NCUA/CFPB regulations around indirect lending oversight to understand how to handle the dealer’s customers best.
It’s similarly important to be aware of the most common types of fraud and their relative loss exposure. The chart below contains some averages:
Indirect Auto Lending Fraud Types by Frequency, 2025
Source 1 | Source 2 | Source 3
Starting a conversation with those in charge of financing at a dealership will help stakeholders understand the risks involved and whether these risks are worth taking. A credit union and dealership partnership makes sense if the strategies match up on any deal involving indirect lending.
Tailor Tech to Dealer’s Needs
Utilizing modern lending software allows credit unions to evaluate a dealer’s market focus and tailor their services to meet the needs of a dealer’s customers. Today’s technologically savvy car buyers will be drawn to those lenders who offer a means to access their services easily, such as:
- Dealer API integrations
- e-Contracts
- e-Signatures
- Automated Funding integrations
Thus, offering a means for customers to communicate via smartphones and other mobile devices will help seal the deal. This aspect of a consumer’s experience should also be tailored so that the dealer’s negotiations focus on what will best suit a member, allowing for repricing and restructuring of deals. Technology can benefit the dealer as well if the member already has dealt previously with a dealer; they have access to account information that can speed up the origination process.
Make Applications Easy
Integrating the auto lender’s and dealership’s technology makes the application process easier for members who choose a deal involving indirect lending. Credit unions can thus make loan submissions more efficient, while information like price, make, and model of the vehicle will be automatically included in a loan application. This saves time, allowing for more applications to be considered and thus increasing volume. Such integrations also make it easy to capture and pass on any documentation necessary for the application process, like a photo ID, pay stubs, or proof of residence. This can be combined with e-signatures and e-contracts, which can be completed online, speeding the entire origination process.
Respond Quickly
The speed at which any lender responds with a decision is perhaps the most important factor for both direct and indirect lending. As a general rule, credit unions should be aiming for decisioning within 10 minutes and funding approvals within 1 hour to provide a positive member experience. Optimizing real-time decisioning also improves dealer satisfaction, since it typically improves your pull-through rate.
Today, most auto loan applicants want at least part of the process to be available online. To speed the decisioning process in indirect lending, credit unions should also take advantage of the automation available through various auto lending platforms. Many of these automated processes bypass the need for underwriter intervention during the decisioning process, while addressing CFPB policies for dealer oversight.
Decision speed can be enhanced through:
- Verification services that reduce risk from fraud and other factors for dealers and credit unions, automatically confirming or questioning information supplied by an applicant.
- Auto-structuring features that modify terms and rates to match a credit union’s current lending policies.
- E-contracts and e-signatures allow credit unions to quickly review relevant data, along with confirming receipt of and accepting loan terms.
Credit unions that can respond quickly to requests from dealers will have an edge over their competitors.
Evaluating Your Indirect Auto Lending Model
Credit unions must monitor indirect auto loans more closely, as the tighter profit margins make them more vulnerable than a direct loan to its members. This means understanding the KPIs to watch as well as knowing where they should be. The table below provides five essential indirect auto loan KPIs as well as averaged benchmarks to evaluate performance.
Essential KPIs to Monitor Indirect Auto Lending for Credit Unions
| KPI | What It Measures | Average Benchmark | Solution |
|---|---|---|---|
| Application-to- Decision Time | Speed of LOS processing | ~ >10 min | Automate scoring and routing in LOS |
| Approval-to- Funding Time | Deal finalization window | ~ > 1 hr | Digitize documentation and e-contracting |
| Dealer Pull- Through Rate | % of apps funded vs submitted | ~ 30–40% | Streamline approvals and improve dealer relationships |
| Delinquency Rate (30+ days) | Early default signal | ~ >1.5% | Pre-screen members and use predictive risk models |
| Early Payment Default (EPD) | Loans defaulted in first 6 months | ~ > 1% | Enhance application verification and monitor early trends |
Indirect Lending for Credit Unions with defi SOLUTIONS
When choosing a partner that can assist with indirect lending, credit unions should consider working with an experienced loan servicing provider for technological solutions and managed services that support their direct and indirect lending. Similarly, we recommend looking for providers with extensive experience who can speak to the unique challenges that credit unions face.
By using an outsourced loan management model for indirect lending, credit unions gain access to:
- Capabilities that can easily and quickly bring new products or services to market.
- Comprehensive back-office support for direct and indirect auto lending.
- Expert teams that can immediately step in without the need for product training.
- Processes and solutions that can be configured to meet a credit union’s needs.
- Seasoned white-label customer service representatives.
These options allow credit unions to expand their direct and indirect lending and leasing services, taking full advantage of technology like chatbots that feature conversational artificial intelligence while preserving the human experience. If you are interested in discussing how they may benefit your credit union, reach out to us below.
defi SOLUTIONS is redefining loan origination with software solutions and services that enable lenders to automate, streamline, and deliver on their complete end-to-end lending lifecycle. Borrowers want a quick turnaround on their loan applications, and lenders want quick decisions that satisfy members and hold up under scrutiny. With defi loan origination software, lenders can increase revenue and productivity through automation, configuration, and integrations and incorporate data and services that meet unique needs. For more information on improving indirect auto lending for credit unions, contact our team today and learn how our cloud-based loan origination products can transform your business.
