In-house financing refers to the practice among certain companies of offering loans to their customers to help them purchase the company’s own products and services. For businesses, in-house financing can be desirable because it streamlines the purchasing process for more expensive products, helps set up a second source of revenue for those businesses, and helps them sell more products in their main operations. For these reasons, in-house financing is a common practice among car dealers, particularly among those that target customers who are unable to secure loans from traditional sources due to credit problems.
For customers, in-house financing is the same as all other financial products in that it offers them both upsides and downsides. Each potential customer should consider his or her personal circumstances, weigh them against those qualities, and make an independent decision as to whether in-house financing is the right choice for him or her.
Advantages of In-house Financing
For customers, the main advantages of in-housing financing are its ready availability and convenience plus certain benefits that are common to all or almost all financial products. Car dealers that offer in-housing financing possess a strong incentive to make more loans, even if they are risky, because more loans means more customers being able to afford their vehicles. That, in term, means higher profits. As a result, car dealers are much more likely to offer in-house financing to potential customers with poor or no credit than standard lenders or dealerships. On top of this ready availability, the combination of car dealer and lender means that the car dealer can offer certain special deals that might not be possible elsewhere. For example, a car dealer with in-house financing might offer a customer the options of refinancing later on and trading in old vehicles to drop the cost on the automobile to be purchased.
Of course, in-house financing also offers the normal benefits of auto loans, such as the ability to buy vehicles that would otherwise be difficult or impossible to afford, and the chance to build a better credit rating that will help open up more financing options at better prices in the future.
Disadvantages to In-house Financing
The single overwhelming disadvantage of in-house financing is that it is more expensive than most other car financing options. Car dealers are likelier to charge higher interest rates than traditional lenders. This is particularly true if their customers possess poor or no credit rating, as they present higher risks of defaulting on their debt. Furthermore, car dealers that offer in-house financing are also more likely to impose loan conditions that increase their profit on the loans they offer.
Finally, customers must be careful when discussing which car to buy and how much to borrow with car dealers. After all, dealers have incentives to sell their customers cars that are slightly more expensive than what their budgets can afford. Often, they try and cover that cost by offering longer loan terms. This leads to customers not only buying cars outside of their price range, but also paying more for those cars than they would elsewhere.
Some customers might find the higher costs paid on in-house financing discouraging while others may find its easy availability highly attractive. Individual customers should always take the time to carefully research the bad credit auto loan options available to them and not rush into important decisions.