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Blog Banner - Auto LEnding

Written by Jeff Keltner, SVP Business Development

Automotive lending represents a huge opportunity for banks and credit unions. There’s more than $1 trillion in outstanding car loan debt already out there, and more people are taking out new loans every day. Here's why financial institutions should consider getting into this growing market, how it typically works and what new opportunities auto lending offers.

The Indirect Channel

In the indirect lending model, the customer chooses a car and the dealership connects them with a lender. It’s the most common route for automotive lending today.

The main benefit of indirect lending is its ease of growth. Banks and credit unions can expand their book of auto lending business quickly given the right circumstances.

However, because of stiff competition and incentives for dealers and lenders to add on other products, the margin for these loans is relatively low. Banks and credit unions can build large portfolios through indirect auto lending, but it’s difficult to drive profit.

Direct Lending

Direct lending is the other primary channel for car loans today. It’s essentially the reverse of indirect lending — a customer approaches a bank for a loan first and then finds the car.

Direct auto lending is generally profitable, but it falls short in terms of portfolio growth. Lenders naturally want their portfolios to be scalable and profitable. 

The downsides to these two channels are that lenders must choose between creating a large portfolio with low margins or obtaining high margins on a smaller portfolio. Fortunately, there are two under-used options that have the potential to grow a portfolio that is both large and lucrative.

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Auto lending represents over one trillion dollars of outstanding loans — and is a growing opportunity for banks.

Automotive Refinancing

Upstart recently examined the auto lending market and existing loan volume using sophisticated underwriting tools. The results showed that more than 25% of existing auto loans — at least one in four — could be refinanced at meaningfully lower payments for borrowers. 

Savings are extremely valuable to borrowers during the stress of COVID, yet lenders don’t seem to be pursuing this option proactively. Auto refinance remains a relatively small part of the overall auto lending market.

The gap represents hundreds of billions of dollars in potential lending. The targeted borrowers are good credit risks, as evidenced by their history of payments, making them great prospects for lenders.

What’s more, these borrowers’ creditworthiness will usually improve even more as lower-rate refinancing drives their payments down.


‌By offering these kinds of auto services, lenders can get between the dealer and consumer and open up the market for themselves and their customers.


As the digital transformation in banking ramps up, more alternative routes to purchase have arisen in auto lending.

E-commerce for auto sales is not a well-defined space yet, but Upstart sees a lot of potential. The biggest area of opportunity involves lenders helping with financing as well as car selection.

Lenders can help buyers to choose the right car for their needs, both functionally and financially. The ideal car should be:

  • ‌Suitable for their needs
  • ‌Right for their budget
  • ‌Priced for their financing needs

‌By offering these kinds of services, lenders can get between the dealer and consumer and open up the market for themselves and their customers.

The Takeaway

Auto lending presents a huge opportunity for any bank or credit union looking to put extra deposits to work. Lenders can examine what’s possible in the traditional direct and indirect routes but should also explore the refinancing space and new routes to market which have the potential to help create auto loan portfolios for lenders that are both large and profitable.