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In-House Financing Explained

In House Financing Explained

In-house financing, also known as seller financing, is when a business directly finances a customer’s purchase of its products or services. Instead of the customer getting a loan from a bank, the company itself extends credit and handles the repayment process. In-house financing allows customers an alternative financing option beyond traditional bank loans.


With in-house financing, the customer selects the product or service they want and applies for financing directly through the business. The business then assesses the customer’s creditworthiness and approves or denies the financing application. If approved, the customer makes payments over an agreed term directly to the business, which charges interest and fees. The rates are often higher than with a traditional bank loan. However, the main advantage is that the risk is taken on by the business rather than a bank.


In-house financing can benefit both customers and businesses. Customers with poor credit have an extra financing option beyond banks that may deny them. Businesses can increase sales by offering flexible payment options. In-house financing serves as an introduction to how this alternative financing method works and who tends to benefit most.

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What is In-House Financing?

In-house financing is when a business directly finances a customer’s purchase of its products or services. It is also called seller financing or point-of-sale financing. With in-house financing, the business itself extends credit and handles the repayment instead of a bank or other financial institution.

In-house financing allows customers an alternative financing option beyond traditional loans from banks and other lenders. Rather than applying for credit from a separate institution, customers can get financing directly through the business at the point of sale. This allows more flexibility in purchasing since the business handles the financing in-house.

The key difference between in-house financing and traditional loans is that the business takes on the lending role instead of a bank. The business handles assessing credit risk, approving financing, collecting payments over time, and taking on default risk. This shifts the lending process entirely to the business itself rather than relying on banks or other outside financing.

 

How In-House Financing Works

In-house financing allows customers to obtain financing directly through a business instead of going through a bank or other lending institution. Here’s an overview of the basic process:

The customer selects a product or service from the business and applies for financing. This may be done in-person, over the phone, or through an online application form. The customer provides information such as their name, income, employment, and credit history.

The business then assesses the customer’s creditworthiness to determine if they qualify for financing. The business evaluates factors like the customer’s income, existing debt obligations, credit score, and past payment history. Each business has its own approval criteria.

If the customer’s financing application is approved, the business and customer agree to financing terms. This includes the total amount financed, interest rate, payment amounts, payment frequency, and loan term. The business essentially extends credit directly to the customer.

The customer then makes scheduled installment payments directly to the business over the agreed loan term, rather than paying back a bank. Meanwhile, the business charges interest and fees on the financing. Compared to traditional loans, in-house financing often comes with higher interest rates and fees.

By providing financing in-house, the business takes on the lending risk itself rather than passing that risk onto a bank through a consumer loan. The business must ensure proper underwriting and have access to capital to fund deals.

 

Types of Businesses Offering In-House Financing

There are several industries and business types that commonly offer in-house financing to their customers. Some of the most prevalent include:

 

Automotive Dealerships

One of the most common users of in-house financing are automotive dealerships, especially used car dealerships. Many dealers will finance vehicles directly through their own finance departments rather than sending customers to banks or third-party lenders. This allows them to sell cars to buyers who may not qualify for traditional financing. It also gives the dealership more control over the transaction.

 

Furniture Stores

Furniture stores like couches, mattresses, and appliances are big proponents of in-house financing. These big ticket items would be unattainable for many customers without the option to finance them gradually through the store. Furniture stores can set their own financing terms to encourage more sales.

 

Jewelry Stores

Jewelry retailers often offer custom payment plans or financing through their stores so customers can purchase expensive jewelry, watches, and diamonds. The terms are usually 0% interest over a several month period. Jewelry stores benefit by making sales easier and tapping into a wider customer base.

 

Elective Medical Procedures

Many elective medical procedures like plastic surgery, vision correction, dental work, and fertility treatments can be financed by the providers themselves. This makes these services accessible to more patients by breaking up payments over time. Healthcare providers have an incentive to offer this financing to acquire more customers.

 

Solar Panel Installation

Solar panel installers will often finance the upfront cost of purchasing and installing solar panels on a home. Rather than paying the full amount outright, homeowners can pay over time and benefit from lower energy bills. This incentive helps solar companies sell to more environmentally-minded customers.

 

Custom Home Building

Home builders constructing custom-built or spec homes will sometimes offer their own financing to qualified buyers. This can be easier than dealing with a traditional mortgage lender and gives the builder reliable income over time as the home is paid off.

 

Requirements for In-House Financing

The requirements for obtaining in-house financing vary depending on the business providing the financing. However, there are some common requirements that most businesses look for when approving in-house financing applications:

 

Proof of Income

Most businesses offering in-house financing will require proof that you have a stable source of income. This is often in the form of recent pay stubs, bank statements showing regular deposits, or tax returns if self-employed. The business needs to verify you have enough income to make the required payments.

 

Personal Identification

Businesses will also require valid government-issued ID such as a driver’s license, passport, or other ID. Copies of the ID may be kept on file for identity verification purposes.

 

Down Payment

While down payments are not always mandatory, making a down payment shows good faith and can improve your chances of approval. Down payments often range from 10-30% of the purchase price.

 

Credit Risk Assessment

The business will assess your credit report and credit score to evaluate your credit risk. Each business has its own approval criteria, but many work with applicants who have poor credit. While interest rates may be higher, in-house financing provides an alternative when traditional lenders won’t approve you.

 

Pros of In-House Financing

One of the biggest benefits of in-house financing is the ability to get approved even if you have poor credit or limited credit history. Since the business is acting as the lender, they may be more willing to work with customers who don’t qualify for traditional loans. In-house financing can provide an avenue to financing when you have few other options.

In-house financing may also require a lower down payment compared to a bank. Banks typically want a 10-20% down payment on a loan, but businesses offering in-house financing may only ask for little to no money down. This lower barrier to entry makes purchases more accessible.

The terms with in-house financing tend to be more flexible as well. The business can structure payment plans according to your needs, like setting up weekly or bi-weekly payments rather than one monthly payment. You may also be able to negotiate the length of the loan term to keep payments affordable.

Finally, in-house financing can be a much faster process because there is only one party involved. You don’t have to shop around for loans or wait for a bank’s approval. The business can approve your application in house and get you financed the same day in many cases.

 

Cons of In-House Financing

While in-house financing can be a convenient option for financing a major purchase when you can’t get approved for traditional financing, there are some downsides to be aware of:

 

Higher Interest Rates

In-house financing typically comes with much higher interest rates compared to traditional loans from banks and credit unions. Since the business is taking on the lending risk themselves, they charge higher rates to compensate. Rates can often be over 20% APR for in-house financing agreements.

 

Additional Fees

Beyond just higher interest rates, in-house financing often comes loaded with extra fees like processing fees, documentation fees, and prepayment penalties. These extra costs can add up quickly and end up making the financing much more expensive overall.

 

Limited Consumer Protections

When you get financing through a traditional lender like a bank, you have access to certain consumer protections and regulations that limit predatory lending. These protections are more limited with in-house financing, so it’s important to vet the lender carefully.

 

Risk for Business

While in-house financing increases sales for businesses, it also comes with substantial risk. If customers default on payments, the business takes the hit. They also have to expend additional resources on lending operations and debt collection efforts.

 

In-House Financing vs Bank Financing

When it comes to obtaining financing, you generally have two options – going through a traditional bank or lender, or getting in-house financing directly through the seller. There are some key differences between these two financing methods that are important to understand.

Interest rates are often higher with in-house financing compared to banks. Because the seller is taking on the lending risk themselves, they will build a higher interest rate into your payments to compensate for that risk. Banks can offer lower rates by spreading risk across many borrowers.

In-house financing usually involves fewer fees. You may just pay a documentation fee to the seller, while banks tend to charge origination fees, application fees, and other closing costs. However, in-house financing may have prepayment penalties if you pay off early.

Getting approved for in-house financing can be easier thanks to less stringent requirements. Sellers will mainly look at your income, job history, and down payment amount. Banks scrutinize your credit score, debt-to-income ratio, and credit history much more closely before approving a loan.

In-house financing terms are often shorter than bank loans. You may be looking at 12-24 month financing from a seller, while banks commonly offer 36-72 month loans for vehicles. The shorter term keeps your monthly payments higher with in-house deals.

When weighing your financing options, consider both the costs and ease of getting approved. In-house financing works best for those who don’t have strong enough credit to qualify through a bank. If you do qualify for a bank loan, the lower rates and fees may make more financial sense long-term.

 

Improving Your Credit with In-House Financing

One of the biggest benefits of in-house financing is the potential to improve your credit score over time. Many people with poor credit turn to in-house financing when they are unable to qualify for traditional loans. While the initial interest rates may be higher, making consistent and on-time payments can help rebuild your credit.

In-house financing reports your payment history to the major credit bureaus. So as long as you make all your payments on time, your credit score will gradually improve. Most in-house financing agreements allow you to refinance after 12-24 months of consistent payments. This allows you to take advantage of lower interest rates as your credit score goes up.

For example, you may start with a high interest rate of 18% due to poor credit. But after a year of on-time payments, you may be able to refinance at a lower 12% rate. This saves you money on interest while also continuing to build your credit. Just be sure to read the refinancing terms carefully so you fully understand your options.

The key is consistency. Set up automatic payments if possible, and pay at least the minimum due every single month. This establishes a track record of reliable payments and proves you are now a lower credit risk. As your credit score improves, so do your financing options. In-house financing provides a path to eventually qualify for prime rates.

 

Who Benefits from In-House Financing?

In-house financing can benefit certain individuals and businesses more than others. Here are some of the main types of customers who tend to find in-house financing advantageous:

 

Those with Poor Credit or Limited Credit History

One of the biggest benefits of in-house financing is that it provides an alternative option for those who may not qualify for traditional bank financing. Customers with poor credit scores, limited credit history, or past issues like bankruptcy may have their financing applications rejected by banks and other mainstream lenders.

However, businesses offering in-house financing tend to be more flexible with their approval criteria. They may overlook credit challenges and approve loans based on factors like income level, down payment size, and relationship with the business. While interest rates may be higher, it gives those rebuilding their credit access to financing that might otherwise be unavailable.

 

Small Business Owners

For small business owners, in-house financing can provide quick access to capital needed for growth and expansion. Rather than waiting weeks for a traditional small business loan, a piece of equipment or machinery could be financed in-house much faster. The streamlined application process is more convenient than dealing with all the paperwork and delays of banks when timing is critical.

In-house financing also allows small businesses to preserve capital and credit lines with their bank for other uses. And the flexible repayment terms possible with in-house financing may better align with the business’s cash flow.

 

Customers Wanting Flexible Terms

Finally, customers who want more personalized and flexible financing options can benefit from in-house financing. For example, seasonal workers with fluctuating income may prefer custom payment plans that align with their unique income schedule rather than rigid loan terms from a bank.

In-house financing provides the opportunity to negotiate financing details like payment amounts, payment frequency, length of loan term, down payment amounts, and interest rates. This flexibility and customization allows the financing to be structured around the customer’s specific situation.

 

Evaluating In-House Financing Offers

When considering in-house financing, it’s important to thoroughly evaluate the offer and make sure it aligns with your needs and budget. Here are some tips for assessing an in-house financing deal:

 

  • Compare interest rates and fees to other lenders – In-house financing often comes with higher interest rates and fees, so compare all costs to bank loans or other financing options.
  • Review all terms closely before signing – Read the full contract and understand the repayment terms, interest rates, fees, penalties for late payments, etc. Don’t sign anything you don’t fully understand.
  • Get price quote without financing first – Know the base price of the product/service before discussing financing options. This helps you assess if the financing terms are reasonable.
  • Ask about early repayment options – See if you can pay off the loan early and if there are penalties for doing so.
  • Consider the dealer’s financial health – Research the company offering financing and make sure they are financially stable.
  • Check impacts on your credit – Will on-time payments be reported to credit bureaus? How will a late payment impact you?
  • Weigh benefits and risks – In-house financing can be costly but provide access to credit. Evaluate if benefits outweigh potential risks.

 

Thoroughly vetting an in-house financing offer allows you to make an informed decision on whether it is the right option for your situation. Don’t rush into a deal without considering all impacts and alternatives first.

 

Tips for Obtaining In-House Financing

If you are considering in-house financing for your next big purchase, here are some tips to help ensure you get approved and receive the best possible terms:

 

Have Down Payment Ready

Most in-house financing programs will require a down payment, often 10-30% of the total purchase price. Having these funds readily available can make you a more attractive borrower and may help you negotiate a lower interest rate. Make sure you have the down payment cleared and ready before starting the application process.

 

Provide All Required Documentation

To assess creditworthiness, in-house lenders will require documents like a driver’s license, recent pay stubs, bank statements, references, and possibly a credit check. Be prepared to provide complete and accurate documentation to avoid delays or complications. Having everything ready shows you are an organized and trustworthy borrower.

 

Ask About Promotions or Discounts on Interest Rate

Some businesses will offer special financing promotions from time to time, such as reduced interest rates for a limited period. Before applying, make sure to ask if there are any discounts or promotions available that could lower your rate. If not, you may be able to negotiate a lower rate by agreeing to a larger down payment or shorter repayment term.

 

Alternatives to In-House Financing

While in-house financing offers some advantages, it’s not the only way to obtain financing for a major purchase. Here are some alternatives to consider:

 

Traditional Bank Loans

Getting a loan from a bank or credit union is the most common way to finance a purchase. Banks will assess your creditworthiness and ability to repay the loan. Interest rates may be lower than in-house financing and you’ll have access to more consumer protections.

 

Credit Unions

Credit unions are member-owned nonprofits that often offer better rates and fees compared to banks. You’ll need to become a member but requirements are usually minimal. Credit unions are more likely to work with borrowers even if they don’t have perfect credit.

 

Online Lenders

Online lenders like SoFi, Upstart and LendingClub use technology to provide fast loan decisions. Rates may be competitive and you can complete the entire process online. Be sure to compare offers as some online lenders charge very high rates.

 

Peer-to-Peer Lending

With peer-to-peer lending sites like Prosper and LendingClub, you borrow from individual investors instead of a bank. You’ll fill out a loan application that investors can fund all or part of. Peer-to-peer loans usually have fixed rates and terms.

 

Conclusion

In summary, in-house financing provides an alternative way for consumers to finance large purchases directly through the seller rather than going through a bank or other lending institution. It allows flexibility for those who may not qualify for traditional financing. However, it does come with some drawbacks like higher interest rates.

In-house financing tends to benefit certain types of businesses more than others. Those selling big ticket items like furniture, jewelry, vehicles, and home renovations frequently offer their own financing. It gives them a competitive edge to approve customers banks would decline. However, the risk falls entirely on the business.

For consumers, in-house financing provides an option for those with poor credit to still obtain financing. It can help rebuild credit when payments are made on time. However, consumers should be aware of the higher rates and fees associated with in-house financing. Carefully evaluating all options is important before entering into any financing agreement.

Overall, in-house financing serves a specific purpose in the lending marketplace. When used strategically and with full transparency, it can benefit both businesses and consumers looking for flexible alternatives.

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Questions About In House Financing

In-house financing in Canada refers to a type of financing where the seller provides credit directly to the buyer for the purchase of a product or service, instead of the buyer obtaining financing from a third-party lender like a bank.** In-house financing enables buyers, especially those with poor credit, limited credit history, or other barriers to qualifying for traditional loans, to finance big-ticket purchases like vehicles. It also provides sellers with an advantage by facilitating sales that may not otherwise occur.

In-house financing provides several key benefits for Canadian car dealerships:**

 

– **Increases sales opportunities:** By offering financing directly, dealerships can approve buyers who may not qualify for third-party loans. This allows them to make sales they’d otherwise lose.

 

– **Higher profits:** Interest rates are typically higher with in-house financing, allowing dealerships to earn more income per sale. There can also be additional fees.

 

– **Customer loyalty:** Financing a vehicle in-house can lead customers to return to the same dealer for future purchases and service needs.

 

– **Greater control:** Dealerships can tailor loan terms and set their own credit standards when providing financing themselves.

Most in-house car financing programs in Canada do not have strict minimum credit score requirements, unlike banks and other mainstream lenders.** In-house financing enables dealerships to approve buyers with credit scores under 600 or even 500 in some cases. The required score can vary by dealer. Those with extremely deep subprime credit below 400 may still face denial but have the best shot at approval with in-house financing.

Yes, financing a car purchase through a dealership’s in-house financing program can help rebuild your credit over time in Canada.** As long as you make your payments on time each month, this shows positive payment behavior. Paying down the loan also mixes different types of credit and shows you can responsibly manage installment loan debt. Both can cause your scores to gradually improve.

The main drawbacks of financing a car through a dealership instead of a bank in Canada include:**

– **Higher interest rates** – In-house financing tends to come with much higher interest costs, meaning greater expense over the loan term.

– **Possibility of predatory terms** – Less ethical dealers may try to impose unfair fees and charges in the contract.

– **Limited financing regulation** – Oversight is less stringent for in-house financing providers than banks.

– **No option to shop rates** – Buyers lose the ability to compare rates from different lending sources.

Most in-house financing providers at Canadian used car dealerships do require a down payment, but the specific amount can vary greatly.** Some may allow a very small down payment of just a few hundred dollars, while others ask for 10-20% or more. Buyers with very poor credit tend to need larger down payments. The best practice is to ask the dealer about down payment requirements prior to applying for in-house financing.

Interest rates on in-house car loans directly from dealerships typically range anywhere from 10% on the low end up to 29.9% for buyers with very poor credit in Canada.** The average interest rate is around 15-20% for subprime borrowers. Those with good credit scores may qualify for rates under 10%. However, in-house financing virtually never offers prime level rates below 5%, even for well-qualified applicants.

Yes, dealerships can repossess a vehicle if the buyer continually fails to make payments on an in-house financing loan in Canada.** Repossession rules are similar as with a traditional auto loan. The dealer must first send a written Notice of Intent to repossess giving the buyer a chance to pay before seizure. This notice also outlines options to voluntarily surrender the vehicle. If payments remain delinquent, physical repossession may proceed.



In-house financing from Canadian car dealerships usually ranges from 12 months to a maximum of 84 months (7 years).** 36 and 48-month terms are also very common. The longer the repayment term, the lower the monthly payment amount will be, but the greater the total interest paid over time. Buyers should aim for the shortest comfortable term they can afford based on their budget.

Yes, Canadian dealerships offering in-house financing have full legal rights to pursue collections actions against delinquent borrowers who default on their auto loans.** After attempting to work out a payment plan and sending demand letters, the dealer can assign the account to a professional collections agency. They can also pursue court judgements, wage garnishments, and vehicle repossession orders as permitted by provincial laws.

Important questions to ask dealerships about their in-house financing in Canada include:**

 

– What are your interest rates and terms for buyers with my credit score?

– Is there a minimum credit score or down payment required?

– Do you charge any origination fees or prepayment penalties?

– What flexibilities do you offer if I face financial hardship down the road?

– What actions would you take if I can’t make payments suddenly?

– Will you report my payment history to credit bureaus?



The interest rate on an in-house car financing loan from a dealership in Canada cannot be increased after signing the contract, unless the buyer specifically agrees to a variable rate.** Dealers can, however, adjust other fees and charges related to a loan, like late fees or returned payment fees. This makes it critical to understand all potential costs before signing an in-house financing agreement.

For most borrowers in Canada, a personal loan from a bank or credit union provides lower interest rates and is a smarter option than high-cost in-house dealer financing.** However, buyers with poor credit often cannot qualify for standard personal loans. For them, in-house financing may be the only route to get necessary vehicle financing, despite the higher rates.

Alberta and Ontario have the greatest concentration of dealerships offering in-house subprime financing programs in Canada currently.** These provinces have also seen some of the fastest growth in recent years. British Columbia, Quebec, and other provinces also have widespread availability of buy here, pay here dealers providing direct financing to those unable to obtain standard auto loans.

No, buyers in Canada are never obligated to use a dealership’s in-house financing offer and can choose their own lender instead.** However, those with poor credit may find external financing difficult to obtain. Dealers also cannot force buyers to use certain third-party lending companies that the dealer has referral relationships with either. Consumers have full freedom to shop financing.

If issues arise with a dealership’s in-house loan in Canada, buyers can file complaints with provincial consumer protection authorities or the federal Financial Consumer Agency of Canada (FCAC).** Providing written notice to the dealer about disputes and attempting to resolve matters directly is advisable first. If unfair or predatory lending practices are suspected, regulators can investigate and take potential enforcement actions as warranted.

Yes, some lenders do offer auto loan refinancing products in Canada that essentially pay off the existing in-house dealer financing with a new, lower-rate bank loan.** These refinance loans allow buyers to potentially save substantially on interest costs. Approval often requires having reestablished sufficient credit since originally buying the vehicle, as well as meeting other risk criteria.

If a dealership offering in-house financing goes bankrupt in Canada, responsibility for continuing to make payments would still fall on the buyer.** Rights to the loan contract get transferred to the dealer’s creditors. So long as payments remain current, there is typically no impact even following a dealer liquidation. Consumers may lose certain contract benefits or protections, however, depending on provincial laws.

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