What Does ‘We Finance’ Mean and How Does It Work?
Explore "we finance." Understand how businesses help customers buy now and pay later through various credit arrangements and essential concepts.
When businesses advertise “we finance,” they offer credit to help customers acquire products or services. This allows individuals to make larger purchases, like vehicles or appliances, and pay for them over time. Instead of requiring full upfront payment, financing makes goods more accessible by spreading the cost, providing a pathway to obtain items without immediate financial strain.
What “We Finance” Means
The phrase “we finance” means a seller facilitates the purchase of goods or services through a credit arrangement. This allows customers to acquire items immediately and pay for them in installments, usually with added interest. This can involve the seller directly extending credit, known as in-house financing, or partnering with external financial institutions like banks or credit unions.
In-house financing means the retailer acts as the direct lender, managing the loan agreement and payment collection. This approach allows retailers to offer flexible borrowing terms directly to consumers, sometimes bypassing traditional financial institution requirements. It is common in industries like automotive dealerships, furniture stores, and appliance retailers.
When a business offers in-house financing, they become both the seller and the lender, often simplifying the purchasing process. This can benefit customers who find it challenging to qualify for traditional bank loans due to their credit history. While offering accessible terms, in-house financing often has specific requirements, such as a down payment or proof of income.
Common Financing Options
Third-party financing is another widespread approach, where the seller partners with external financial institutions. The seller facilitates the loan application, but a bank, credit union, or specialized lending company provides and manages the actual loan. The third-party lender assumes the financial risk and manages the loan’s terms, while the business receives payment for the sale upfront. This option offers customers a wider range of potential lenders and terms, including installment loans or lines of credit.
A distinct financing model is the lease-to-own agreement, which differs from traditional loans. Under this arrangement, a customer pays to use an item for a specified period, with the option to purchase it at the end of the lease term. A portion of regular payments might contribute towards the eventual purchase price. This model is commonly used for larger consumer goods, providing flexibility for those not ready for an immediate purchase but who wish to acquire the item later.
The Financing Process
Engaging with a “we finance” option typically follows a structured process. The initial step involves inquiring with the seller about available financing options for the desired product or service. This discussion clarifies what types of financing the business offers and what general requirements exist. The customer then proceeds to complete a credit application, which can be a paper form or an online submission.
Upon receiving the application, the lender, whether in-house or a third-party institution, conducts a credit check. This review assesses the applicant’s credit history and current financial standing to determine creditworthiness. Following the credit assessment, the applicant receives notification regarding the lending decision, indicating either approval or denial of the financing request.
If approved, the customer must carefully review the proposed loan terms, which include details such as the interest rate, the total repayment period, and the overall cost of the loan. Understanding these terms is important before proceeding. The financing process culminates with the signing of the formal loan agreement, solidifying the commitment between the customer and the lender. Once the agreement is signed, the customer can complete the purchase and take possession of the financed item.
Key Financial Concepts
When considering financing a purchase, several financial terms are important to understand. The “principal” refers to the initial amount of money borrowed for the purchase, excluding any interest or fees. As payments are made, the outstanding balance that still needs to be repaid is also referred to as the principal.
“Interest” is the cost of borrowing money, calculated as a percentage of the principal amount. This charge is what the lender earns for providing the funds. The “Annual Percentage Rate” (APR) provides a more comprehensive measure of the total cost of borrowing, as it includes both the interest rate and certain additional fees, expressed as an annual rate. Lenders are required to disclose the APR, making it a useful tool for comparing different loan offers.
The “loan term” defines the duration over which the borrowed money will be repaid. This period can range from a few months to several years, depending on the loan amount and type of financing. A “down payment” is an upfront sum of money paid by the buyer towards the purchase price, reducing the amount that needs to be financed. Making a larger down payment can often lead to lower monthly payments and reduced overall interest costs.
A “credit score” is a numerical representation of an individual’s creditworthiness, based on their credit history. Lenders use credit scores to assess the risk of lending money, with higher scores generally leading to more favorable loan terms and lower interest rates. Finally, “collateral” is an asset pledged by the borrower as security for a loan. If the borrower fails to repay the loan, the lender has the right to seize and sell the collateral to recover their losses, which can include items like vehicles or real estate.