Consumer Financing Facts
FACT 1: When a consumer is approved for financing, the finance company takes a risk on the consumer making all payments to fulfill the financial obligation.
FACT 2: Financing is never free. The business or consumer – or both – pay interest or a fee for the privilege of financing.
FACT 3: Interest paid by a consumer over the life of the loan is one way finance companies make money.
FACT 4: A consumer finance company’s goal is to approve as many consumers as possible without too high of a risk.
Guaranteed Approval For Customers?
Knowing these four facts, we ask again: Is my customer guaranteed to be approved for consumer financing? The answer is no.
There are certain actions to help a business increase the possibility of a consumer being approved:
- Prior to completing a credit application, ask your consumer a few questions to help determine if they’ll be approved:
- Does the consumer have a source of income? If yes, they have a method to repay and a higher chance of being approved.
- Has the consumer had bankruptcy in the past seven years? If yes, they may not be approved, although other circumstances could help the credit app be approved.
- Ask consumers if they’ll set up auto-pay from their bank or credit card, which shows higher repayment commitment and lower risk.
- Ask your consumer financing company for a program that has a higher ability to approve more consumers with not-great credit. This type of program may cost the business slightly more but helps the company sell more.
Two examples of consumer financing programs
Tiered merchant rate
The business pays a lower or higher percentage of the financed amount depending on a consumer’s risk factor. The higher the fee for high-risk consumers, the higher the chance a consumer will be approved
| Credit Quality | Risk of Repayment | Merchant Fee | Example Fee for a $1,000 Contract |
| Poor | High Risk | High | 20% – $200 |
| Medium | Medium Risk | Medium | 10% – $100 |
| High | Low Risk | Low | 0% – $0 |
Flat merchant rate
The business pays a flat percent of the financed amount, perhaps 7%. A retail installment contract value of $1,000 – and the flat fee to the finance company would be $70. Consumers with poor credit quality might not be approved.
A business needs to determine what is most important to them: serve additional customers even though their margin may be slightly lower, or lose the sale, because the customer didn’t have the upfront funds to cover the up-front cost of their purchase or no room on their credit cards.