Digital transformationLending Automation

In-House Customer Financing. Customer Centricity Of Digital Lending

It has become trendy to in-house finance customers across all industries. Digitalization of lending and putting customers in the center are on the high tide too. 

Is there an option to combine the two trends? How can in-house financing software help goods or service providers become customer-focused?

Let’s take a closer look and see it.

In-house financing. What’s in this name?

In-house financing is an alternative lending program when a borrower is granted a loan from a retailer for purchasing goods or services. 

To offer in-house financing, retailers must have an established lending entity in their retailing business infrastructure. The customer begins the loan by paying an upfront payment. After that, regular payments that include interest are made until the loan is repaid.

Speaking about in-house financing, we mean the lending process when a loan is issued by a seller with no involvement of banks, credit unions, or any other credit institutions. 

In other words, it’s a point-of-sale (POS) credit extended to a customer on the spot with no necessity to visit a bank. The owner of a business determines the loan terms, borrower’s creditworthiness, and repayment schedule. 

Who can benefit from in-house financing

The spheres of business that can benefit from in-house financing most of all:

  • Auto financing
  • Healthcare
  • Retail
  • House renovation
  • Furniture installment

In-house financing. How does the program work?

In the case of an in-house financing program, a retailer acts as a lender defining the customer requirements, interest rate, repayment conditions, and other loan terms. 

The customer requirements are often less stringent than in banks. That’s why in-house financing is very appealing for those who have no or have a bad credit history, or for some other reasons do not meet the requirements of traditional lenders.

Some sellers may not even check a customer’s credit history or perform credit scoring. However, some factors are taken into consideration, such as:

  • customer income
  • residency
  • down payment size

The other side of this flexible borrower assessment is that a seller can charge a higher loan interest rate or define a larger down payment to make sure a customer is willing and able to repay the loan.

The application for an in-house financing program can be made by a customer either online or in person. The terms of the loan agreement are negotiated. If a customer meets certain requirements, a good or service is sold.

If in-house financing is arranged correctly, it is a win-win play for both businesses and customers. 

Business gets the tremendous opportunity to onboard and retain loyal clients. Customers are able to purchase high-quality goods and services without the influence of their credit score on what they buy.

Digitization of customer assessment and decision-making

Digitization of lending and customer-centricity can ideally complement each other. By leveraging digital software solutions, in-house financiers can assess their customers in real-time with no loss of time.

Customer creditworthiness is measured accurately and fast according to the predefined parameters. That allows retailers to offer the best loan conditions to borrowers while staying safe from default probability.

Below, you can see examples of an in-house financing software system. We’d like to share some screenshots of ABLE Platform it with you.

Figure 1 shows how the solution builds customer scorecards.

Scorecard builder

Figure 1. Scorecard builder

In-house lenders can define a wide range of parameters in it for a more thorough customer analysis.

In-house financing software should enable lenders building scorecards of any complexity on the basis of Machine Learning models and support the following features:

  • An unlimited number of scorecards and model versions.
  • ML model support as separate components and as Python scripts.
  • Import of any models supported by PMML standard.
  • Dual-scorecard and multi-scorecard matrixes and models.

Acquiring customer data is becoming a vital condition for effective lending. In Figure 2, there’s an application decision builder window. It allows lenders to make loan decisions on the basis of various methods and data sources. 

Application decision builder

Figure 2. Application decision builder

For ensuring a 360-degree view of a customer for accurate application decisions, a digital solution should have the following functions:

  • Application data enrichment from internal and external data sources.
  • Data enrichment calls directly from decision flow.
  • Risk-based pricing, LTV-based pricing.
  • Behavior-based and event-based pricing.

Digital in-house financing software embraces a wide variety of functions and features. Very often, it’s hard to select the ones you need without consulting experts. Get in touch with our team to get free consultation on that matter.

Pros and cons of in-house financing

Implementation of digital solutions is a great option for minimizing drawbacks and revealing the full potential of advantages. But what are they?

Let’s take a close look at the program to have a clear vision of both the benefits and downsides of this type of lending.

Advantages of in-house financing

Here is the list of benefits that in-house financing provides in comparison with traditional lending.

  • Convenience. A borrower has the opportunity to negotiate and manage lending agreement terms with the seller right at the moment of purchasing. This type of lending is much faster and more convenient than applying for a loan from a third-party bank or financial institution.
  • Access to high-quality products. Customers can buy new, high-quality products that are not affordable for purchase outright at full price.
  • Flexibility. Customers have an option to negotiate the terms of loan repayment on a more flexible basis. That includes negotiating interest rates, amounts of upfront down payment, terms of loan amortization, and schedule of payments.
  • Minor credit history importance. Customers with no credit history or a poor credit score have better chances to get the approval of a loan application in an in-house financing program than in the case of applying for a loan in traditional banks or other financial institutions.

In-house financing downsides

Alongside the benefits, there are downsides as well.

  • Higher interest rates. To ensure themselves from past-due loans, retailers usually charge borrowers with higher interest rates than those in traditional banks and other lending organizations. Comparatively, high-interest rates are charged to justify the lowered barriers of loan approval and serve as a protection for sellers from loan defaults.
  • Hard sell. It can prevail and outweigh the borrower’s financial safety. Salespeople who represent the borrower may be too pushy to make a sale. This may cause selling customers loans that do not correspond best to their financial interests.
  • Limitations of purchase options. As retailers offer only their services and products, this limits customer purchasing options.
In-house financing armed with specialized software solutions will have much more trust from the potential borrowers. That will completely eliminate all the drawbacks by making the lender-borrower relationship transparent.
Sergey Artimenia
Sergey Artimenia
DIRECTOR OF BUSINESS DEVELOPMENT

Models of in-house financing

In-house financing provides various models of lending, depending on business goals and loan terms.

  • No charge in-house financing takes place when selling becomes a marketing tool and the ultimate advantage of the business. That enables the generation of a great number of customers instead of making money directly.
  • A retailer can charge a flat interest rate for expanding and servicing each loan until full repayment. Or a business owner can charge a one-time fee that includes all the expenses.
  • A discount rate is one more option of offering an interest rate. The rate is always lower than in a bank, which allows a seller to get a competitive advantage and provide customers with quicker services while making money for covering expenses.

Do I need in-house financing?

In-house financing options can benefit borrowers as well as lenders. 

For making an immediate purchase, customers may turn to using in-house financing programs if they are concerned about their credit score or when they have already checked and failed using other financing methods. 

Retailers, in this case, may benefit from getting borrowers rejected by traditional lenders and who try to rebuild their credit history and scoring or can’t put off their purchase because of an emergency case.

However, to in-house finance such customers, it’s necessary to check their creditworthiness more thoroughly and offer them a credit line they can repay without defaulting.

In-house financing requirements 

In spite of the simplicity of in-house financing in terms of credit scoring and the credit history of potential borrowers, there are certain requirements customers should meet. 

When qualifying applicants for an in-house financing program, it’s necessary they meet the following requirements:

  • have steady employment approved by a certificate
  • provide papers showing the customer’s minimum income
  • have papers to prove residency
  • make an upfront down payment

Alternatives to in-house financing

In-house financing is not a standalone phenomenon. It has certain alternatives that we are going to describe.

Direct financing

This option implies the involvement of banks, credit unions, and other traditional financial institutions and online lenders. 

By using the direct financing method, a customer is approved to expand a loan of a set amount. The disbursed loan can be used by a borrower without purchasing limitations. 

Direct financing via a credit union engagement can be a good option for borrowers with minor credit issues, because they may be more flexible and willing to work with such a customer. 

In addition, direct financing defines a limit of a loan on the basis of customer creditworthiness and ability to repay.

Dealer financing

With dealer financing, suitable loan providers are found by dealers. 

The customer still makes a purchase at the dealer’s lot, but it’s necessary only to fill out a loan application that the dealership will send to several lending institutions on the borrower’s behalf. 

In this case, a borrower may face some drawbacks, such as mark-up charges set up by the dealership, and goods selection limitations. 

The borrowers with good credit scores and history may get profitable lending conditions from a dealership and even be offered a 0% interest rate.

Digitization of in-house financing. Another step forward.

Digital transformation has already become an inseparable part of making business and everyday life. In-house financing and digitization of lending are the perfect matches in this case.

Digital solutions implemented to in-house finance customers are mutually beneficial both for retailers and consumers. 

Contact our team to know more about boosting benefits from digital tools leveraging while minimizing effects from in-house financing shortcomings.

FAQ

What is in-house financing?

In-house financing is when a customer gets goods or services from a supplier on certain repayment conditions without the intermediation of banks or other financial institutions (FIs).

Which is better: bank or in-house financing?

Other ways of financing have both advantages and downsides. The choice between them is determined by various factors reflecting the borrower’s financial status.

What is the difference between bank financing and in-house financing?

Bank financing is a type of funding when a loan is issued by a bank. In-house financing excludes financial intermediaries like banks or any other FIs from the lending process, and a loan is extended by a product or service supplier.

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