More consumers are submitting their own credit applications online rather than letting a dealership F&I manager do it for them, auto lenders and industry observers say.
"Consumers are saying, 'Why do I need to go to the bank? Why do I need to go to the F&I department?'" says Tom Alexander, finance department chairman at Northwood University in Midland, Mich.
Young consumers do it the most, but to a degree, consumers of all ages are interested in online financing, he says. "Why not just go online at home, get your loan, go to the dealership, and pick up your car?"
The percentage of direct loans -- loans not arranged through the dealership -- is still relatively low. According to the Power Information Network, direct loans and cash buyers accounted for about 21 percent of U.S. retail volume in the first quarter, down slightly from a year ago. But in the long run, an increase in direct loans could erode dealership profits.
That also raises a potential problem for auto lenders that make both direct-to-consumer loans and indirect loans negotiated at the dealership. Those lenders include many banks, some independent finance companies and credit unions.
Santander Consumer USA of Dallas, a subprime and near-prime lender that makes both direct and indirect auto loans on new and used vehicles, call this dilemma "channel conflict."
Dealerships typically earn nothing or, in some cases, a flat fee on direct loans. But they can make hundreds of dollars per car by marking up the interest rate on indirect loans, a practice called dealer reserve.
Cash buyers and buyers who walk into the dealership with a direct loan in hand are less likely to buy aftermarket products, such as extended-service contracts, wheel-and-tire protection or GAP, which also erodes dealership revenue.
Online customers may not like being "flipped" to an indirect loan at the dealership. But according to Atlanta-based AutoTrader.com, about 80 percent of customers who try to arrange their own financing get switched to an indirect loan at the dealership.
Financially, that's not necessarily bad news for the consumer. An indirect loan can be a better deal because of factory incentives from captive finance companies that aren't available on direct-to-consumer loans -- and savvy F&I managers know how to use a lower interest rate to snag more finance business and sell aftermarket products that can be included in the financing.
Nevertheless, there's a big disconnect between customers seeking their own financing and the dealership F&I process, which is geared toward indirect loans. At the very least, switching customers to an indirect loan is inefficient. At worst, customers may feel like they're being sold something they don't want.
"There's a tremendous amount of dissatisfaction out there," said Chip Perry, CEO of AutoTrader.com, at a conference in April.
Many consumers -- especially younger ones -- take for granted that they can conduct all their business online. In addition, many consumers don't fully trust the dealership F&I process. Those factors are fueling the growth in online applications.
Here are a few examples:
-- AutoTrader.com says it sees an average of 25,000 online applications for preapproved, direct loans monthly. The company sends those leads to dealerships, but the stores don't even open close to half of them, Perry says, and that contributes to customer dissatisfaction.
-- Santander Consumer USA says its RoadLoans.com online channel for direct loans is growing. Online applications for direct loans make up 15 to 20 percent of Santander's total auto loan applications. But most of those get switched to indirect loans at the dealership. Direct loans account for substantially less than 10 percent of Santander's total volume, the company says.
-- VW Credit, meanwhile, had a 48 percent increase in online loan applications in just six months, CEO Andrew Stuart says. That growth came after VW Credit and Volkswagen of America gave online credit apps more prominent placement on their Web sites late last year. VW Credit wouldn't disclose a specific number for its online applications.
Santander Consumer USA tries to minimize channel conflict by structuring its direct-to-consumer loans so they don't undercut indirect loans at dealerships, Lana Johnson, a company vice president, says.
VW Credit avoids bumping heads with its dealers because it doesn't make direct-to-consumer loans, Stuart says. The captive finance company makes indirect loans through dealerships exclusively, he says. VW Credit customers who apply online can qualify before visiting a dealership, but they can't get a loan for a specific vehicle. For that, they have to go to a dealership for an indirect loan.
But Stuart says the growth in online applications shows that customers like the concept of applying online before they go to a dealership.
"It's popular," he says. "Something like online credit apps really make sense."