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What is In-House Financing and How Does It Work?

Last updated 03/19/2024 by

Jamela Adam

Edited by

Fact checked by

Summary:
In-house financing is a lending option provided by the company that sells you the product or service. This can be a potential option for those shoppers who don’t have a high enough credit score and won’t qualify for traditional loans offered by third-party financial institutions. However, you can usually get better rates and terms by comparing multiple lenders.
Are you considering purchasing a high-ticket item such as furniture or a car but don’t have the cash on hand to do so? In such a case, in-house financing may be a viable option for you. This type of financing allows you to finance your purchase through the company from which you’re buying the item.
Though being approved for in-house financing is relatively easy and it’s often easier to qualify than applying through a traditional lender, it can often come with many downsides and risks. Before deciding to go with this financing method, make sure to understand how it works and whether it’ll make financial sense for you. Read on to learn everything you need to know about in-house financing and its pros and cons.

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How does in-house financing work?

Companies offering in-house financing will need to have established a lending business entity as a part of their company before offering this lending option to customers.
For example, if you decide to purchase a used car from an in-house financing dealership, you’d speak with the financing department about an auto loan. They then review factors such as your income and the amount you can put down to determine whether they want to offer a loan to you on the spot.

Who offers in-house financing?

Car dealerships are well-known for offering in-house financing to potential car buyers. According to an FDIC study, around 6.4% of auto loans originated from “buy-here-pay-here” dealerships that set their own loan approval requirements and offer car loans at their own discretion.
Customers can make loan arrangements and payments at the same car dealership where they purchased the car with this financing method. This can seem convenient compared to the sometimes lengthier process of traditional auto loan financing. However, unless you have excellent credit and can qualify for special financing options, you will probably be able to save money by comparing multiple auto lenders.

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Is in-house financing available for other purchases?

In-house financing programs can also be a way to finance a house—though it is not as common as traditional mortgages. Some realtors in the industry process local loans and operate as mortgage lenders, offering in-house mortgages to potential homebuyers.

Pros and cons of in-house financing

Like any other financing option, in-house financing can be beneficial but also risky at the same time. So be sure to weigh the pros and cons carefully before making your decision.
WEIGH THE RISKS AND BENEFITS
Here is a list of the benefits and drawbacks to consider.
Pros
  • Streamlined application process. Since you don’t have to apply for a loan through third-party lenders such as banks or credit unions, in-house financing can be a relatively quick process. Once approved, you can purchase the product or service and begin making monthly payments to the seller.
  • Lenient credit requirements. Another notable benefit of in-house financing is that it provides a possible financing option for those with bad credit history. Unlike traditional lenders that rigorously examine your finances before approving your application, sellers are usually more lenient when it comes to your credit history. Some even claim to not conduct any credit checks.
Cons
  • High-interest rates. In exchange for the flexibility and leniency of the approval process, in-house financing tends to come with much higher interest rates compared to traditional loans. Some sellers will also want you to pay a high down payment to minimize risks.
  • Limited purchase options. Because sellers can only offer in-house financing for their own products and services, your purchasing options will be limited. Instead of getting approved for a loan and then shopping around for the best offers in town, you’ll need to find a seller that not only offers in-house financing but also has the ideal product you’re looking for.

Alternatives to in-house financing

Though in-house financing has some attractive selling points, the high interest rates can increase your total loan balance and put unnecessary pressure on your financial life.
If you already have poor credit to start with, this may not be the wisest financial decision to make. Here are some alternative methods worth considering to help you make that purchase without sabotaging your financial wellness.

Save up

For those with bad credit or limited credit history, the idea of borrowing money with an in-house loan to purchase a high-ticket item can be appealing. However, due to high interest, you could end up paying far more than the product or service is actually worth.
If you’re not in a rush, consider saving up until you have enough funds in your bank account to buy the product or service outright. This way, you can completely avoid accruing interest charges.

Get a cosigner

Getting a cosigner can often increase your approval chances for loans that you might otherwise not be qualified for. If you have a trusted family member or friend that has good credit, consider asking them to cosign a traditional loan with you.
Keep in mind that a cosigned loan affects both signers. If you fail to make loan payments on time, the missed payments will affect your credit and your cosigner’s credit report.

Shop around

Just because your loan application was rejected by one lender, doesn’t mean every one of them will refuse to work with you. In fact, there are many legitimate lenders for borrowers who have bad credit. If you take the time to compare loan estimates from each lender, you can potentially find a great deal that fulfills your financing needs.
This doesn’t have to be for just auto loans either. We recommend comparing multiple lenders whether you’re searching for a car loan, mortgage, or personal loan.

SuperMoney may receive compensation from some or all of the companies featured, and the order of results are influenced by advertising bids, with exception for mortgage and home lending related products. Learn more

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Consider refinancing

If you already financed your vehicle with in-house financing, you may be able to save money by refinancing your loan with another lender. The comparison tool below can help you filter auto refinance lenders. Before accepting an auto loan refinance, check whether your current lender will charge you a prepayment penalty. If they will, include this in your calculations when determining whether a refinance makes sense for you.

SuperMoney may receive compensation from some or all of the companies featured, and the order of results are influenced by advertising bids, with exception for mortgage and home lending related products. Learn more

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Pro Tip

When shopping for loans, always request quotes from more than one lender. Though doing so may take more time and effort, in the long run, it could save you quite a bit of money. Not to mention, it could also give you some negotiating power if one lender tries to give you a higher rate than another.

FAQs

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

The main difference between traditional financing and in-house financing is that bank financing is done through a third-party financial institution, while in-house financing is completed internally within a business. Also, compared to bank loans, in-house loans typically don’t require extensive paperwork or have stringent criteria.
Another notable difference between the two is the interest rates. Since sellers take on more risk by offering in-house financing to customers with less-than-ideal credit scores, the interest payments can be higher than traditional loans that have strict credit score requirements.

Does in-house financing go on your credit report?

Some businesses that offer in-house financing will report your loan to the consumer credit bureaus, while other businesses won’t. If you’re looking to improve your credit score and build your credit by making payments on time, be sure to ask the company this question beforehand.
It’s also important to note that if you default on your payments, the seller can still report you to the credit bureaus. Be sure never to miss a payment, as the consequences can be costly.

Is in-house financing a good idea?

While in-housing financing seems like an easy and straightforward financing method, you’ll typically end up paying more for the product or service due to higher interest rates. Even if you have no credit history or a so-so credit score, it’s always wise to explore other lending options before resorting to in-house financing.
If you aren’t able to get a loan through traditional lenders, consider finding a cosigner to improve your likelihood of loan approval or hold off on the purchase until you’ve boosted your credit score.

Key Takeaways

  • In-house financing allows customers to directly take out a loan from the business selling the product or service. Customers can do this instead of applying for a loan through financial institutions such as banks or credit unions.
  • Though many businesses that offer in-house financing have a lenient approval process, you still need to meet common borrowing requirements. These include affording a down payment and having a certain level of income.
  • While in-house financing offers a way forward for those who don’t have good credit or have no credit history, it typically comes with high-interest rates that can increase your total loan cost.
  • Car dealerships are known for offering in-house financing. However, this type of financing option can also be found at furniture retailers and even real estate firms.

Offer in-house financing to your customers

If you own a business and want to offer flexible payment and financing options to your customers, consider checking out our contractor financing platform. This free platform allows you to offer your clients the convenience of in-house financing while still giving them the benefits of comparing multiple lenders.
Using this platform is a win-win. Not only can you allow your customers more time to pay for high-quality products and services, but offering comparable financing can also boost your sales and help you close more deals.

SuperMoney may receive compensation from some or all of the companies featured, and the order of results are influenced by advertising bids, with exception for mortgage and home lending related products. Learn more

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