There are two ways vehicle financing is usually handled.

Direct Lending:
Is a direct transaction between the borrower and the lender, without the dealer getting involved in the financing process.

With direct lending, the buyer chooses a vehicle, then goes directly to a lender, or finance source (bank, credit union, etc.), completes a credit application and negotiates rates and terms. The buyer then returns to the dealer and the finance source funds the purchase of the vehicle. The buyer then makes payments to the finance source.

Indirect Lending:
Indirect financing is used by retailers of expensive products to finance purchases by their customers, and is the most common type of vehicle financing.

Using the vehicle financing as an example, the steps in an indirect financing transaction are:

• A buyer and a dealership enter into a contract
• The buyer agrees to pay the amount financed, plus an agreed-upon finance charge over a specified period of time.

The dealership may retain the contract, but usually sells it to another creditor to service the account and collect the payments.

For the vehicle buyer, indirect or in-dealership financing offers a number of advantages:

• Convenience: a buyer can select a vehicle and get financing all in one place
• Multiple finance sources: the dealership's established relationships with a variety of finance sources mean buyers are more likely to obtain suitable financing
• Special programs: from time to time dealerships may offer manufacturer-sponsored, special low-rate programs that would otherwise not be available to buyers.