In House Financing Meaning Example How Does It Work

In House Financing Meaning

Explanation

When a seller offers the purchaser the option of credit on his own or through a single third-party financier to purchase the goods, it is called in-house financing. This helps the purchaser buy the product, as they can pay in monthly installments.

How does it Work?

In-house financing is done when the company or seller has a strong credit-providing facility or deals with a single credit provider to finance their customers. It simplifies the work of both the seller and the customer.

If a customer purchases a product and doesn’t have money to pay, the product cost is split monthly based on the plans they choose, and credit is provided for them. But, again, there won’t be many formalities or time to process these loans as they are provided with the seller’s own risk.

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Reasons for In House Financing

If a customer has a low credit score or doesn’t have a good credit history, he may not be eligible to get a loan from a bank or other financing company. They can use this in-house financing facility.If a financing company takes time to process and the seller needs that product immediately, he can choose this option.With this, the seller can attract more customers as there won’t be many procedures, and they won’t take much time to process those loans.Purchaser doesn’t need to pay any down payment, and the entire amount can be divided over a few months, which makes their burden less.The buyer has an option to negotiate with the seller about payment terms, rate of interest, and down payment.

Example of In House Financing

Let’s consider Mr. X has a branded electronics showroom and he is selling all items from TV, washing machines, .etc. A customer wants to purchase a TV that costs $100, has no money to make down paymentDown PaymentDown payment is the initial deposit made by the buyer to the seller when purchasing an expensive item, such as residential property or a car. It comprises a portion of the total purchase amount of the asset and takes place via cash, bank check, credit card, or online banking. read more or initial payment and he is not eligible to get loans from banks or other financing companies.

X here provides Mr. A with the in-house Financing option where Mr. A can pay the money for 12 months, with a 5% interest rate per month, and the procedure is very simple that he can take the loan within minutes.

In this example, the loan provided by the seller at his discretion and the payment terms, as well as the interest rate, is negotiated with the seller; hence it is known as in-house financing.

Advantages

Facilitates customer with instant loans instead of the time-consuming process.It is helpful for people who can’t get loans from banks and other financial institutionsFinancial InstitutionsFinancial institutions refer to those organizations which provide business services and products related to financial or monetary transactions to their clients. Some of these are banks, NBFCs, investment companies, brokerage firms, insurance companies and trust corporations. read more as it is flexible with terms of issuing loans to customers.Whether you pay down payment or not it is not considered.The customer will be retained for the seller, and he will purchase again with them.Seller provides discounts to customers who opt for their in-house financing options that banks can’t offer.Once the loan is closed by the customer, it increases the customer’s credit score.Customers can negotiate with the seller for interest rate, down payment, discounts, etc.

Disadvantages

The seller decides the interest rate, higher than the banks and other financial institutes.The customer may pay more as the price will be with a higher interest rate.The seller also must consider whether the customer pays his dues correctly, as the loan is given at his discretion..In some cases, the seller sells only used goods for in-house financings, like the used car dealership.

Conclusion

Though in-house financing has many advantages like less time-consuming, not much paperwork, and flexibility with payment terms, it also has disadvantages. A customer must efficiently choose the terms of payment and interest rate to benefit from such financing options.