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FAQ – Is My Customer Guaranteed to be Approved for Consumer Financing?

Consumer Financing Facts

FACT 1:    When a consumer is approved for financing, the finance company takes a risk on the consumer making all their payments to fulfill the financial obligation.

FACT 2:    Financing is not 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 how 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:

  1. Ask consumers if they’ll make a down payment, which shows higher repayment commitment and lower risk.
  2. Prior to completing a credit application, ask your consumer a few questions to help determine if they’ll be approved:
    1. Does the consumer have a source of income? A job or a household partner with income? Another income source? If the consumer has an income source, they have a method to repay and a higher chance of being approved.
    2. 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.
  3. Ask consumers if they’ll set up auto-pay from their bank or credit card, which shows higher repayment commitment and lower risk.
  4. Ask your consumer financing company for a program that has a higher ability to approve more consumers with lower-quality 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 4-6%. A retail installment contract value of $1,000 – and the flat fee to the finance company would be $50. 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.