Questions and Answers

Indirect lending occurs when a seller of goods or services sells to a buyer on credit and then sells the credit instrument to some sort of lending institution. For example, a car dealer might sell a car to a buyer and have the buyer sign a retail installment contract that allows the buyer to pay the purchase price over time, with interest. The car dealer then might sell the retail installment contract to a bank at a discount (meaning for less money than the dealer could collect if it held on to the retail installment contract).  

The transaction as a whole is called "indirect lending" because, from the bank’s point of view, it has loaned money to the buyer of the car but has done so indirectly—in effect, through the seller—rather than in the form of a direct loan of cash to the buyer.  

So indirect financing always involves three parties—a seller, a buyer, and an entity that buys the credit document from the seller.