The term ‘in-house financing’ refers to financing that is provided directly to consumers by retailers or other firms. It allows people to purchase and finance goods and services directly from the seller, eliminating the reliance on third-party lenders. Common in industries like automotive and large retail purchases, in-house financing has its unique set of advantages.
Key Takeaways
- In-house financing is when a retailer extends a customer a loan for the purchase of its goods or services.
- The need for banks or other third-party lending institutions is eliminated through in-house financing.
- Approval for a loan is typically easier and the process simpler when financing is obtained through the retailer.
- The automobile industry is one of the largest industries utilizing in-house financing.
- With the emergence of technology firms and mobile apps, point-of-sale financing allows for immediate financing for consumers.
Understanding In-House Financing
While some people are able to, most don’t have enough money to pay for large purchases outright in cash. That’s where financing comes into play, involving borrowing money from another party to complete the purchase. In-house financing replaces the role of banks with the retailers themselves extending the credit.
Car manufacturers and large retailers often provide in-house financing to facilitate purchases. This type of lending benefits consumers by offering loan options where traditional financing means, like banks, may have turned them down.
Retailers need an established lending business within their firm or a partnership with a third-party credit provider to offer this service. Practices are common in the automotive and certain retail sectors with big-ticket items. However, some dealers may add extra fees, so it’s crucial to read the fine print.
Special Considerations
Emerging financial technology (fintech) platforms provide larger in-house financing options with faster and more convenient point-of-sale (POS) credit platforms. These streamline the lending process, allowing for immediate credit decisions right at the moment of purchase. Consumers generally benefit from quick approvals and higher credit limits, making it easier for retailers to finalize sales.
Credit-backed sales have become particularly popular, taking a significant share away from traditional lenders. An estimated 13% to 15% of purchases will use credit-backed POS technology by 2023.
Types of In-House Financing
Automotive Industry
The automobile sales industry prominently uses in-house financing as it relies on auto loans for vehicle purchases. By offering in-house loans, car dealers can close more deals, accepting more varied credit profiles. This flexibility means those rejected by banks might still obtain car loans through these programs.
Medical and Dental
Certain elective medical and dental procedures may not be covered by insurance. Providers of these services may offer in-house financing to make their high-cost services more accessible, ensuring continued customer loyalty and repeated visits.
Retailers
Large retailers, like big-box stores, often use in-house financing for expensive items such as appliances, electronics, and furniture. Many companies offer store credit cards or specific loans, utilizing this system to build customer loyalty and simplify large purchases.
Example of In-House Financing
Ford Credit is a well-known in-house auto financing group. Since partnering with AutoFi, Ford has made car purchases simpler by integrating online shopping platforms that allow customers to shop and obtain financing conveniently. This minimizes time at the dealership and speeds up the sales process for both the dealer and the consumer.
How Does In-House Car Financing Work?
In-house car financing means that a dealership lends customers part of the car’s purchase price, securing an additional income stream from interest payments. However, smaller in-house lenders might not match the interest rates offered by large banks or credit unions. Comparisons are essential before opting for in-house loans.
Is Bank or In-House Financing Better for Buying a Car?
There’s no definitive answer, as it depends on the offered rates and additional features. Banks may offer ’true’ interest rates, while dealerships could charge extra fees but possibly lower rates on newer cars. Additionally, some dealers provide promotional 0% initial financing.
Why Do Stores Offer In-House Financing?
In-house financing presents an additional revenue stream from interest payments, often positioned as store credit cards. While these rates are higher compared to traditional cards, they might offer rewards or perks beneficial to loyal customers.
Related Terms: loans, credit, auto loan, point-of-sale financing, fintech, retail finance
References
- McKinsey & Company. “Buy now, pay later: Five business models to compete”.
- Ford. “Ford Credit and AutoFi Debut Platform for Faster, Smoother, Simpler Digital Vehicle Buying”.
