What is an In-House Loan? A Comprehensive Guide

An in-house loan, also known as in-house financing, is a type of financing where the seller provides the loan directly to the buyer for the purchase of their goods or services. This eliminates the need for the buyer to obtain financing through a third-party source like a bank or credit union.

In-house loans allow buyers who may not qualify for traditional loans to finance big-ticket purchases like cars furniture or appliances. Sellers also benefit from added revenue streams and repeat business.

Below is a comprehensive guide to understanding what in-house loans are, how they work, their pros and cons, and how to get one.

What is In-House Financing?

In-house financing refers to when a business directly finances a customer’s purchase of its products or services The seller essentially acts as the lender, setting the loan terms and taking on the risk of extending credit

Some examples of businesses that commonly offer in-house financing include

• Auto dealerships – Many provide financing to customers looking to buy new or used vehicles.

• Furniture stores – May offer financing for expensive furniture or mattress purchases.

• Electronics retailers – Allow customers to finance high-ticket items like TVs and computers.

• Medical/dental facilities – Offer payment plans for elective procedures not covered by insurance.

• Home improvement companies – Provide financing for renovations like new roofs, windows, or siding projects.

Rather than applying through banks or other traditional lenders, customers complete the loan application and approval process directly through the seller. This allows the business to extend credit and capture sales they may have otherwise lost.

How Does In-House Financing Work?

The in-house financing process is relatively simple compared to third-party loans. Here are the basic steps:

1. Customer initiates purchase: The customer visits a business looking to buy a product or service that requires financing. For example, someone may want to purchase a $20,000 vehicle from an auto dealership.

2. Seller offers financing: If the customer requires financing, the salesperson directs them to the financing department. The associate gathers information and determines loan terms based on the seller’s criteria.

3. Customer applies for loan: The customer fills out an application providing personal, employment, and financial details. This usually includes a credit check.

4. Seller makes approval decision: Using its own lending criteria, the seller decides whether to approve the customer’s loan application and finalize the terms.

5. Customer makes purchase: Once approved, the customer can complete the purchase, signing a loan contract with the seller to finance the balance.

6. Customer makes payments to seller: Instead of a third-party lender, the customer makes their monthly loan payments directly to the seller until the balance is paid off.

Pros and Cons of In-House Loans

In-house financing offers some benefits but also comes with drawbacks to consider.

Pros

• Easier approval: Sellers may be more flexible on credit requirements than banks, improving approval odds for those with poor credit.

• Faster process: Completing the entire financing and purchasing process through one seller simplifies and speeds up the transaction.

• Negotiation opportunities: Buyers may be able to negotiate the loan terms and sales price when working directly with the seller.

Cons

• Higher costs: Interest rates and fees are often higher compared to third-party financing.

• Limited flexibility: In-house loans can only be used at that particular seller, restricting purchase options.

• Risks for seller: As the lender, the seller assumes all liability if the borrower defaults on the loan. Their recourse is limited to repossessing the item sold.

Who Should Consider In-House Financing?

In-house loans best serve customers who:

• Have limited credit options: Those with poor credit have a better chance at approval going direct to the seller rather than a bank.

• Need financing urgently: The faster in-house loan process works for those who need quick financing and can’t wait on bank approval.

• Want to negotiate: Buyers can sometimes negotiate the loan terms and sales price directly with the seller.

• Value simplicity: The streamlined “one-stop shop” for financing and purchasing is convenient for some customers.

However, buyers with very good credit may get more competitive rates by shopping lenders. And the high cost of in-house loans makes them less ideal for larger financing needs.

In-House Financing Requirements

While criteria varies by seller, here are some typical requirements for approval of an in-house loan:

• Minimum credit score – Often 600 though some may not check credit

• Down payment – Typically 10-25% of the sales price

• Debt-to-income ratio – Usually a max of 50%

• Proof of income – Pay stubs, tax returns, bank statements

• Collateral – The item being purchased serves as collateral

Meeting the minimum requirements improves the chance for loan approval but doesn’t guarantee it. The seller makes the final decision based on perceived risk.

Getting an In-House Car Loan

One of the most common uses of in-house financing is for car loans. Here’s an example of the process:

1. Jack needs a used truck but doesn’t have strong enough credit to qualify through his bank. He finds a pickup he likes at a local dealership that advertises “Buy Here Pay Here” in-house financing.

2. Jack discusses his financing situation with the sales rep, who directs him to the on-site financing department.

3. The financing manager has Jack fill out an application and provide documents to verify income, residence, and assets for down payment.

4. Although Jack’s credit score is only 590, the dealership approves him for an $18,000 loan at 12% APR with 10% down given his steady job and income.

5. Jack makes a $2,000 down payment, signs the in-house loan contract, and drives home in his “new” used truck. He now makes a monthly payment directly to the dealership.

While costlier than third-party financing, the in-house loan allowed Jack to purchase the vehicle he needed. As long as he makes consistent payments, it will also help rebuild his credit.

Alternatives to In-House Financing

In-house loans offer a unique way to finance purchases, but aren’t the only option. Some alternatives include:

• Bank/credit union loans – These traditional loans often have lower rates but stricter requirements.

• Peer-to-peer lending – Borrow from individual investors through an online platform.

• Credit cards – A revolving credit card allows more flexibility but generally has higher interest rates.

• Personal loans – Unsecured loans from online lenders offer fixed payments but no collateral.

• Retail installment contracts – Some major retailers offer their own financing programs.

• Rent-to-own – Lets you pay for an item in installments while using it, but ends up costing more overall.

Each option has pros and cons to weigh based on your financial situation and goals.

Tips for Getting Approved for In-House Financing

If you need financing for a major purchase but have less-than-ideal credit, here are some tips to boost your chances of getting an in-house loan:

• Shop sellers that advertise financing for any credit: This indicates flexibility on credit requirements.

• Be prepared to make a sizable down payment: A 10-25% down payment minimum is common.

• Bring proof of steady income: Provide recent paystubs, tax returns, and bank statements.

• Double check your debt-to-income ratio: Make sure new loan payments will fit comfortably in your budget.

• Consider bringing a cosigner: Adding a cosigner with better credit helps offset your poor credit.

• Ask about financing pre-approval: Being pre-approved makes the purchasing process easier.

• Read the fine print: Understand all fees, terms, and conditions before signing anything.

With the right seller, an in-house loan can be a viable financing option even with poor credit. Just be sure to shop around, read the fine print, and consider alternatives before committing.

The Bottom Line

In-house financing serves an important purpose in enabling customers to finance purchases directly through the seller when they may not qualify for loans elsewhere. While these loans carry more risk and potentially higher costs for borrowers, they can be an accessible financing lifeline for those with limited options.

For buyers, it’s important to weigh the pros and cons of in-house loans against alternatives and approach them with eyes wide open. As long as you understand the terms and risks, they can serve as short-term financing solution when needed. But improving your credit to access third-party financing should be an ongoing goal.