Indirect Auto Lending: The Credit Union Addiction We Don’t Talk About Enough

In the early days of indirect auto lending, the mission was simple: convenience for the member.

Back in the 1990s, visionary credit union leader Diana Dykstra, then at The Golden 1 Credit Union, helped create a network called CUDL (Credit Union Direct Lending). The idea was revolutionary. What if a credit union member could walk into a car dealership on the weekend, after hours, and still get a loan through their trusted credit union? CUDL enabled that vision by connecting credit unions and auto dealers through a digital platform, offering members access to their own financial institution while sitting in the finance office at the dealership.

It was a member-first model. Emphasis on member.

But somewhere along the way, the purpose got lost. What began as a service to existing members became a race to pad loan portfolios with anonymous members - people who never walked into a branch, never downloaded the mobile app, and never even knew they “joined” a credit union.

And now? Indirect auto lending has become the credit union industry's favorite drug.

A Quick Hit That Feels Good….At First

When a credit union finds itself with too much liquidity - money sitting idle, not earning a return - indirect lending can be a fast fix. It’s a faucet that can be turned on and off. Need more loans? Turn it on. Want to boost income? Turn it up.

But like any addiction, it’s not sustainable. And the withdrawal symptoms can be brutal.

The Hidden Costs Nobody Talks About

On the surface, indirect loans may seem like low-hanging fruit. But the true cost is often swept under the rug:

• Dealer incentives ("spiffs"): Credit unions pay real money, sometimes hundreds of dollars per loan, to incentivize dealers to push their financing. It's not always about best fit for the member; it's about who pays the most.

• Operational labor: Even with automation, many credit unions still have to manually enter data from dealer paperwork into their core systems. The irony? You're burning staff hours for a member you'll likely never see again.

• Rate pressure: Indirect lending is a race to the bottom. Most credit unions compete for “A paper” borrowers, those with the highest credit scores and lowest risk. This means you’re offering your best rate (and the thinnest margin) to someone who might never engage with your institution again.

But here's the real rub: many boards, in their well-meaning desire to avoid risk, will only approve participation in indirect lending if it's limited to top-tier credit. The logic? Avoid losses. The result? Systemic exclusion.

By chasing A paper only, credit unions effectively shut out a large portion of the population - often lower-income, minority borrowers - who tend to have thinner or lower credit profiles, not because they're high-risk, but because they’ve been historically underserved by financial institutions.

So we end up reinforcing the very inequities credit unions were created to solve.

Withdrawal Symptoms Are Real

According to TruStage, new vehicle sales dipped in June of this year marking the first back-to-back monthly sales decline since mid-2023. Credit unions that decide to wean themselves off indirect lending often experience symptoms that look a lot like withdrawal:

• Vomiting (Loan drop-offs): Your loan volume will likely dip before you rebuild it organically. That’s expected, and necessary.

• Night sweats (Income and membership declines): You’ll feel the pinch. Those easy monthly interest payments and inflated new member numbers vanish. It’s uncomfortable, even scary.

• Irritability (Board pressure and staff stress): Everyone will feel it. But that doesn’t mean it’s the wrong move.

This is rehab. And it’s worth it.

Because on the other side of that pain is something far more valuable: sustainable growth built on real relationships. Members who know they belong to a credit union. Members who refer friends. Members who come back.

The Path to Recovery

So what’s the alternative?

• Build from within. Focus on deepening relationships with your current members. What do they need? How can you be their first call - not the dealer’s second option?

• Use indirect lending strategically. It can still be a useful tool - but treat it like a faucet, not a firehose. Don’t get hooked.

• Reconsider your risk appetite. If your board is only comfortable with A paper, ask why. Is it mission-aligned? Or just easy? Are you measuring risk by spreadsheet… or through the lens of financial inclusion?

• Tell your story. Too many consumers don’t understand what a credit union is. And when they sign a loan in a dealership finance office, they leave without knowing they just joined a movement. That’s a missed opportunity.

From Anonymous Loans to Intentional Impact

Credit unions were never meant to be passive paper-pushers. We were built to serve people. Especially those overlooked by traditional banking models.

If indirect auto lending is your primary growth strategy, it’s time for an honest conversation. Ask yourself: Is this a business model or a coping mechanism?

Because like all addictions, it might feel good now - but the real health, growth, and impact comes after the detox.