Businesses that sell more "luxurious" or pricier products or services should always have several payment options for their customers. Accepting exclusively one-time payments in home improvement, HVAC, or healthcare can lead to severe revenue losses. Why? Because many customers can afford your service, but not if they have to cash out all at once.
Just 39% of U.S. Citizens can afford an unexpected $1,000 expense. Meaning, by accepting only one-time payments, you lose more than half of potential customers. That's why more and more intelligent businesses offer installment loans as part of their financing options.
Depending on the customer's credit score and credit history, buyers can get different loan amounts. As a business, you can provide installment loans by yourself or by partnering with a lender or lending partner.
Since many small businesses don't have the proper experience to handle a loan request’s legalities, give installment loans, and manage late payments, companies often go with the latter option.
But that doesn't mean you shouldn't know how the whole credit score and credit reports business works. To help you get smarter, here's an educative introduction to offering installment loans to customers with a bad credit score.
What is an Installment Loan?
You might not be familiar with the term "installment loan,” but you probably encountered one. An installment loan is a cash loan where the client borrows a fixed loan amount at once. The borrower repays the loan amount over a fixed amount of monthly payments (installments). Although an installment loan usually has fixed monthly payments, the monthly installments can differ if the installment loan comes with variable interest rates.
An installment loan can either be an unsecured or a secured loan. A secured loan requires collateral, while unsecured loans don't.
That's the general definition of an installment loan, but repayment terms can vary. Clients always look for a fixed-rate loan with affordable monthly payments and a low origination fee. Just because someone needs an installment loan, they don't want to go through debt consolidation, especially if their credit score isn't too great.
To get an installment loan and borrow money, banks usually look individual's credit score first. Based on the credit report from credit bureaus, the bank decides on the loan amount, down payment, interest rates, etc. If a client has poor credit, the bank can deny loan approval.
3rd party lenders (such as a credit union) have more flexible criteria and a quicker loan process, especially for clients with bad credit scores and poor credit history. The main reason is that 3rd-party lenders are private companies and have more law leeway. Although clients can't open a bank account with nonbanks, they can get different loan types such as auto loans, student loans, etc.
For example, if an individual needs to pay unexpected medical bills, 3rd party lenders are a quick way to get loans. That's why it's no surprise that nonbank lenders issued 68.1% of total mortgage loans in 2021 alone.
Is a Personal Loan an Installment Loan?
People mistake a personal loan and an installment loan as different. In reality, an installment loan falls under the more general personal loan category.
A personal loan is any granted loan that an individual gets for covering expenses for different reasons. An auto loan or a student loan can be a personal loan.
But not every personal loan has to necessarily have fixed monthly installments as part of its loan agreement.
Another example is payday loans. Clients usually have to repay payday loans by their next payday. Although some payday loans can be installment loans (with interest rates), installment loans are a broader term. Most importantly, payday loans often don't require checking the credit history.
In conclusion, a personal loan is the most general term of the three. An installment loan is a subcategory of personal loans, and a payday loan is a further specification.
The three most common types of installments loans are car loans, mortgages, and consumer loans.
Auto installment loans can range from 12 to 96 months. Meaning, the client needs to repay their installment loan across 12 to 96 monthly payments.
Longer terms usually mean lower monthly payments but also higher interest rates. Meaning, if a client takes an installment loan over 96 months compared to 12 months, they will pay less each month, but the overall cost will be higher due to higher rates.
A mortgage is an installment loan used to buy a house. Due to a high loan amount, mortgages can last anywhere between 15 to 30 years. Similar to car loans, mortgages usually have fixed monthly payments, and the longer the payoff period, the bigger the rates.
Since mortgages last for decades, they play a vital role in a client's debt to income ratio, further impacting the chances of getting another installment loan. If the client is late with their payments, lenders can hesitate to approve a new loan offer.
A business offers consumer loans to customers interested in buying a "high-end" item or service. Although it can be a luxury, it can also be essential such as medical bills.
Depending on your industry, the reason for consumer installment loans can range from cosmetic surgery services to roof financing.
Generally, any business can offer consumer loans to make the purchase easier for the customer. But before we explain that, first, we need to understand how a credit score affects installment loans.
Poor Credit Score & Installment Loans
Depending on where a client gets a personal installment loan (traditional bank, credit union, nonbank lenders), they need to fulfill criteria set by the financial institution's loan term.
The credit score tells the lender how likely the client will stick to the repayment schedule and repay the loan amount in time. The official FICO credit score goes from poor to exceptional:
- Poor (less than 580) - Consumers with poor scores have the slightest chance of getting monthly installment loans. Especially if they have debt and their debt-to-income ratio is high.
- Fair (580 to 669) - Although still below average, consumers with a fair score can get personal installment loans with high-interest rates and other unfavorable terms.
- Good (670 to 739) - Individuals with a good credit score are at or above average and can usually get an installment loan with competitive interest rates.
- Very Good (740 to 799) - Clients with a very good credit score are low-risk clients who can get many different personal loans with high loan amounts and fixed payments.
- Exceptional (800 to 850) - Clients with an exceptional credit score have access to the most favorable, fixed interest rates and can get the best installment loans.
How the Credit Score Affects the Loan
Credit ratings affect the possibility of an installment loan and the general loan term elements such as required monthly payment, loan amount, interest rate, etc.
Depending on your credit score, the interest rates can differ as much as a whole percentage. Meaning, clients with bad credit scores might pay 4% interest instead of 3%. This might not seem much at first, but it gets more significant with long-term loans.
Let's say a client is browsing long-term installment loans for home improvement. Since home improvement requires more significant loan amounts, the difference can quickly hit 5-figure amounts over a more extended period.
How to Offer Installment Loans for Bad Credit?
If you're running a small business, there are two ways to offer installment loans through consumer financing: primary or via a 3rd-party lender.
- Primary Financing - The business acts as a lender. Meaning, the company offers the service but also involves financing the customer. This means the business owner is the one who checks the client's credit history, approves loans, provides the agreed loan amount, and keeps a watchful eye over personal loans issued previously.
- 3rd-Party Lender - If a business owners partners with a 3rd-party lender, the lender takes over the risk of providing installment loans. Meaning, the lender provides the money and manages the entire installment loan process.
What makes 3rd-party lenders so attractive is that they offer a solution both for the business owner and clients. It's in the business owner's interest to provide flexible financing solutions. Not only are 3rd-party installment loans more relaxed, but they are more accessible as well.
Clients can borrow money by applying for an installment loan online. Furthermore, clients looking to get online installment loans usually don't need a bank account. Finally, although it's better if a client doesn't have bad credit, the chances are higher with a 3rd-party lender than the traditional bank.
The most significant advantage for the business owner is that you get the pre-determined loan amount the moment the 3rd-party lender checks and approves an online installment loan application.
If the client has a bad credit usage history, it affects the client, not the business owner.
For the client, they can compare loan rates and have more flexibility with the initial down payment. Often, the client needs to pay a one-time origination fee. But the client can enjoy the benefits of multiple installments loans without paying any additional origination fee later on.
Benefits of Offering Installment Loans
Because of how installment loans work (fixed monthly payment options), it's easy to see how your business can benefit. Such loans offer more financial flexibility, increase the buying power, and by partnering with the right online lenders, customers can file a loan request online.
Besides getting the loan early, down payment, origination fee, rates are lower and more attractive for your customer, especially those with a weaker credit score.
But offering installment loans has other, more subtle benefits as well.
Offering personal loans (including installment loans) means you can reach out to more customers. Banks need to stick to rules, but in reality, customers with bad credit scores can often afford an installment loan.
As long as you partner with a lender who can do in-debt research, offering installment loans as part of your consumer financing strategy is a sure way to increase sales and revenue.
In a highly competitive market, every little advantage counts, and financial flexibility is more than a minor advantage.
If you can afford your customers different loan options, even more, if they can register for installment loans online, not only are you standing above the rest, but you're ensuring that future customers hear about you too. This brings us to the third advantage.
Customer Loyalty & Reference
Knowing that a family could fix their roof or pay medical bills thanks to you doesn't go unnoticed. If you provide customers with what they want and make it convenient, you can be sure of two things. First, they will come back. Second, they will talk about you to their friends.
The only thing you need to ensure is that you partner with the right lender: a lender who has your interest and the interest of your customers in mind.
Online lenders can sound too good to be true. Although they provide installment loans to customers with bad credit scores, keep in mind that a credit score below 670 has genuine risks.
Some online lenders will approve an installment loan no matter the score. Although that won't impact your revenue directly, it can create a bad reputation if the customer ends up fighting the loan provider.
Remember always to do your research when looking for consumer financing providers.
Finding the Right 3rd Party Loan Provider
It doesn't take much to find consumer financing companies. What can take time is finding a consumer financing lender that's right for your business.
Your customers differ, meaning that it's a bad idea to have the same approach for every customer interested in a loan for your product or service.
Time Investment Company prides itself on a tailored and family-oriented approach. We know that if we want to succeed, businesses we partner with need to be happy. And the only way for a business to strive is to provide top service to its customers.
If you're looking to improve your financing strategy, feel free to contact us, and we will help you take the step in the right direction.