What Is In-House Financing?

In-House Financing Explained

Saleswoman explaining paperwork to a couple at a car dealership
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In-house financing is a form of financing where the business that sells a specific product or service can provide loans directly to customers who need them. This type of financing eliminates the need for a separate, third-party lender.

Below, we’ll dive into how in-house financing works, the pros and cons for choosing this type of financing, and what other options you may want to consider before making a decision.

Definition and Examples of In-House Financing

In-house financing is when the seller takes on the full risk for a loan and makes the final decision on who gets approved and which terms to offer. This is in contrast to working with third-party financial institutions that may have specific requirements for borrowers to meet. Different lenders may also have longer application processes. With in-house financing, the business uses its own funds to extend loans to customers so they can purchase the specific products or services offered.

In-house financing generally offers a simpler application process because both the financing and purchasing steps happen through the seller directly. Potential borrowers complete an application process either online or in person at the business where they’re interested in making a purchase. The business sets specific requirements for borrowers and works with the customer to negotiate the loan terms. If approved, the customer can make a purchase with the loan they were just extended. Monthly payments are then made directly to the seller.

For example, car dealerships are well-known for offering in-house financing. Customers may complete an in-house financing application for a new or used vehicle on-site at the dealership, and get approved the same day.

Dental offices, home goods and electronics stores, equipment retailers, and even home builders may offer in-house financing programs.

How In-House Financing Works

Since the seller acts as the lender and decides the borrowing requirements, in-house financing often appeals to customers who can’t meet the credit requirements of traditional lenders. For example, if you’ve just turned 18 and don’t have a credit history yet, or if you have had to file for bankruptcy, you might turn to in-house financing if traditional lenders have rejected your applications.

Sellers offering in-house financing may advertise this option as “bad credit financing” and approve customers with subprime credit scores. In some cases, the seller may even advertise they don’t do a credit check at all. However, the seller will still look at factors such as your income, residency, and the down payment to judge whether you could repay the loan. In exchange for this flexibility, the seller may charge a higher interest rate on the loan as well as require a larger down payment.

If your credit score is under 670, it’s usually considered fair or poor.

For example, let’s say you want to purchase a used car at a local auto lot that offers in-house financing. When you arrive on the lot, you’d speak to someone in the financing department about wanting to buy a used car you checked out. The dealership would have you fill out a loan application, take a look at documents verifying your income and residency, and ask about your down payment and desired loan amount. They’d come up with an in-house loan offer, which you can try to negotiate. You’d accept the in-house financing offer, fill out all the paperwork to buy a qualifying car, and later make payments directly to the dealership.

Pros and Cons of In-House Financing

Pros
  • Streamlined application process

  • Easier approval if you have bad credit

Cons
  • Potentially higher interest rate

  • Limitation on purchase options

Pros Explained

  • Streamlined application process: Since you apply online or in person and get your decision directly through the seller, in-house financing may be quicker than going through a financial institution. Once approved, you can simply purchase your product or service and make payments to the seller.
  • Easier approval if you have bad credit: Since the seller decides whether to offer you financing, this allows for leniency when it comes to your credit history. Whether the seller skips the credit check or considers other factors besides your score, you may have an easier time getting approved for in-house financing. The new credit line may also help improve your credit score as long as you pay it as agreed.

Cons Explained

  • Limitations on purchase options: Since sellers only offer in-house financing for their products and services, this will limit your purchasing options. Further, car dealerships offering in-house financing might restrict you to using the loan for a certain type of vehicle, such as new or used.

Lower Price, Higher Rates and Fees

Businesses offering in-house financing might offer discounts as part of the financing deal, which could mean a lower price on the product or service. You may even be able to negotiate for the best price. However, there’s also the possibility that the business offers in-house financing with high interest rates and fees. This could happen since the seller has full control over its loans and could cause you to pay more over time in financing costs for your purchase than you might with other financing options.

It may be wise to shop around before choosing in-house financing. You may be able to get a loan with better terms, such as a lower interest rate. Consider getting quotes from different lenders and financial institutions, but be mindful of how this could impact your credit score.

Do I Need In-House Financing?

If you need to make an immediate purchase, you may opt to use in-house financing if you’re concerned about your credit score or you’ve already had other financing methods fall through. This option may benefit you if you’re trying to rebuild your credit and can’t hold off on your purchase, such as in an emergency.

However, you can still check your credit score and reach out to traditional financial institutions that still may be willing to work with you. Going with another financing method or waiting until you can improve your credit score may lead to better interest rates if you don’t need to make a purchase right away.

Alternatives to In-House Financing

If in-house financing doesn’t sound right for your needs, consider other financing options. While they may have more stringent lending requirements, the alternatives could offer better terms and more flexibility if you qualify.

Direct Financing

Direct financing, also called bank financing, involves the borrower going directly to a financial institution such as a credit union or bank to apply for a loan for a purchase. These loans may come with better interest rates than in-house financing. However, you’ll often need a good or better credit score to get approved and benefit from a low interest rate.

Financial institutions usually set their own rules for the minimum credit score, debt-to-income ratio (DTI), and down payment for approval. For example, if you’re using this type of lending to buy a car, you may face restrictions on the car’s age and value, and the minimum loan amount. You’ll likely be quoted terms that you can compare with other offers to get the best deal.

Dealer Financing

Dealer financing is a popular alternative to in-house and direct financing, and involves the seller acting as a middleman between the borrower and a financial institution. For example, you might visit a car dealership, find a car you want to buy, then have the financial department fill out an application with your financial and personal information. The dealership would forward your application to associated financial institutions and present you with loan offers to consider. You can choose the one that works best for you or opt for none of them.

Dealer financing may have a higher interest rate than direct financing because you usually pay slightly more than the quoted buy rate given to the dealership. The dealership adds a small markup to get compensated for its role in the borrowing process. However, you can ask about negotiating the rate as well as consider other financing options if necessary.

How To Get In-House Financing

If you’re interested in getting in-house financing, start by reaching out to the business selling the product or service you wish to finance. You can simply check out the business’s website or visit it in person to find out about the application process and requirements. For example, you might find a used car dealership requires you have a minimum income of $1,500 a month and a 10% down payment to meet the in-house financing requirements.

Whether you complete an application online or in person, you’ll need to provide your personal, employment, and financial information so the seller can decide whether or not to approve you. The process also often involves a credit check as well as showing documents such as paystubs, tax forms, and utility bills to satisfy the application requirements. Loan approval can happen quickly, so you can usually make your purchase right away.

Key Takeaways

  • In-house financing involves taking out a loan directly from the business selling the product or service rather than working with a third-party financial institution.
  • An auto dealership is a common example of a business that offers this type of financing, but others such as electronics stores, equipment retailers, medical facilities, and furniture stores may also offer it.
  • While in-house financing can involve a simpler application and approval process, borrowers may experience higher interest rates and may be limited to buying from the business providing the loan.
  • Alternatives to in-house financing include direct financing and dealer-arranged financing.
  • To qualify for in-house financing, you’ll need to meet common borrower requirements, which may include a down payment, steady employment, minimum income, and proof of residency.