Indirect lending has been a critical component to the credit union industries’ domination of the auto lending market. Credit unions with indirect programs have experienced consistent double digit loan growth with a rich supply of new members who may have otherwise financed with a bank or captive lender. But are these relationships profitable?

According to a 2023 MarketWatch report, over 53% of auto lending is being done at the dealership. These numbers have many credit unions participating in the indirect market. It’s likely your credit union is a big indirect lender, and there are a few reasons for that. First, lending is the lifeblood of any credit union. Indirect lending provides a steady stream of lending opportunities that the credit union can turn up or down based on need. Second, with over half of membership financing at the dealership, not participating may mean missing the opportunity of capturing their own membership’s loan business. Third, it can provide an opportunity to get in front of potential new primary members.

If your credit union does not participate in indirect lending, they are indeed missing out on their members’ business. These credit unions better have an effective auto loan recapture marketing and sales strategy. But that’s a different topic for another article.

Indirect lending comes with some challenges and problems.

1: It is expensive. With sales kickbacks of 1% to 2% of the loan amount and the average financed balance reaching around $35,000, the credit union could pay as much as $700 for each deal. With the added expense of running an indirect program and slim margins, many indirect loans are not profitable until after year one.

2: The average hold time for an auto loan is 22 to 26 months, meaning the credit union will only have between 8 to 12 months of profitability. Far lower than direct lending initiatives.

3: It is difficult to conve...