In-House Financing Guide: How In-House Financing Works

In-house financing is an alternative to bank financing in which a borrower takes out a loan from a retailer to purchase a high-cost item. Retailers must have established a lending business entity as a part of their retailing business in order to offer in-house financing. The borrower will begin the loan by paying an upfront down payment, then making monthly payments that include interest.

Car dealerships typically offer this financing option to car buyers, who will take out a loan with the dealer to pay for the car.

There are key differences between bank financing and in-house financing: the service provider and loan requirements. In-house financing involves financing a high-ticket item with the retailer that is selling it. Bank financing involves seeking out a loan from a third-party lender like a financial institution or a bank.

The requirements a borrower must meet for bank financing are often more rigorous than those for in-house financing. For example, borrowers with bad credit typically cannot access bank financing, but credit scores are less important for in-house financing programs.

Here are some of the benefits of in-house financing over traditional financing:

• Convenience: In-house financing allows the buyer to negotiate and manage the terms of the financing agreement with the retailer at the time of purchase. This type of financing often offers a quicker and more convenient transaction than applying for a third-party bank loan like you would for a mortgage on a home.
• Access to better quality products: In-house financing allows consumers to purchase better quality goods that they couldn’t afford to purchase outright. For example, a car dealership might allow buyers to use in-house auto financing to purchase a new car instead of a used car for the best price possible.
• Flexibility: In-house financing often allows borrowers to negotiate the loan payment terms with more flexibility, including interest rates, down payment amounts, monthly payments, and loan amortization terms (which refers to the life of the loan and how long it takes to pay it off).
• Less reliance on credit history: Consumers with a poor credit score or no credit history are more likely to get approval for in-house financing than they would be for a traditional bank loan.

There are also some drawbacks to in-house financing:

• Higher interest rates: In-house financing often comes with higher monthly interest rates than traditional bank loans. These higher interest rates accompany the lower barriers to loan approval to protect the lenders if the borrower defaults on their loan.
• The hard sell: In-house financing can favor the sale over the financial safety of the customer. Salespeople representing the retailer may do whatever it takes to make a sale, including selling the borrower an auto loan that is not in their best financial interest.

In-house financing outlets will typically report your loan to credit bureaus and credit unions, which can have a direct impact on your credit score. Reported in-house financing will show up as a line of credit on your credit report, which can lower your credit score if you don’t make payments on time.

You can also build good credit by making on-time payments against an in-house financing loan.

All investments and investment strategies entail inherent risks and introduce the potential for financial loss or the depreciation of assets. The information presented in this article is for educational, informational, and referential purposes only. Consult a professional investment advisor before making any financial commitments.

All you need is a MasterClass Annual Membership and our exclusive video lessons from prolific entrepreneur Robert Reffkin, the founder and CEO of the real estate technology company Compass. With Robert’s help, you’ll learn all about the intricacies of buying a home, from securing a mortgage to hiring an agent to tips for putting your own place on the market.