Consumer Financing Essentials

There’s no question that consumer financing has benefits for your customers and your business. With the right financing options, you can empower your clients to make purchases they wouldn’t be able to afford otherwise. That way, your customers get to buy what they want how they want, and your business gets more revenue. What should you keep in mind when implementing customer financing programs?

Different Types of Consumer Financing for Different Clients

You may think that customer financing businesses just snap their fingers and all of your clients are ready to go, but the process is a little more complicated than that. Like any other type of lending, customer financing requires an underwriting process. This means that the lender has to evaluate the credit rating of applicants.

There are several financing programs depending on the rates you want to offer. The first is called primary financing. There are also sub-prime options and tertiary programs.

Details About Primary Financing

A primary consumer financing option provides the lowest interest rates out of the three. This is the type of program that offers promotional offers such as “0% interest for X months.” As an added benefit, your business also has the lowest merchant fees with this option.

The catch is that only customers with an average, good or excellent credit rating can qualify. If you run a retail business that sells to the general public, many of your customers don’t qualify for this financing. That said, the ones who do tend to be people interested in making large purchases.

Sub-Prime Customer Credit Options

The general population in the U.S. falls into this range. It applies to clients who have credit ratings below the average. The majority of your customers can qualify for this type of financing.

Offering this option allows a wide variety of clients to get deferred payments or installment plans. If you sell home appliances, recreational vehicles, electronics, lawn care equipment, HVAC units or other big-ticket items, having sub-prime customer financing is practically a must for your business.

The main downside to this option is that customers have to go through extra steps for approval. They may need to provide proof of income (e.g., pay stubs). This can take extra time.

Tertiary Programs

This type of financing avoids credit checks completely. It has higher risk and therefore higher merchant fees. Only use it if you believe a large number of target customers are likely to have bad credit.