Customer Financing Made Easy: Simplified Financial Terms Glossary

Customer financing can seem complex and confusing, especially when you don’t deal with it every day. The goal of this glossary is to simplify these terms and provide a reference for you and your team. Before we get too into the weeds, though, let’s define customer financing.

Customer financing: A service that allows customers to pay for a purchase over time instead of paying the total amount upfront. This may also be referred to as consumer financing.

There are two types of customer financing you’re likely to encounter: manufacturer financing and specialty financing.

Manufacturer financing: Lending solutions offered by the equipment manufacturer to customers with prime or super-prime credit scores. These loans are typically limited to specific brands or items. An example is financing deals for cars offered by the manufacturer, not an individual dealership.

Specialty financing: Lending solutions that focus on a specific industry, like HVAC. Unlike manufacturer financing, specialty financing typically isn’t limited to a certain equipment brand and may have options for a wider range of credit scores.

Now that we have the basics covered, let’s dive in.

Lending Types

When choosing a lending partner — or multiple lending partners — you’ll come across different lending types. Many of the big banks and other big-name lenders will offer great terms for your customers who have prime or super-crime credit scores. But you also need options for your customers who need some help with their credit. That’s where these lending types come in.

Risk-based lending: An approval process that looks at someone’s entire credit profile, not just their credit score (see also: credit profile). Lenders decide to approve or deny an application and what interest rate they’ll offer based on this more thorough review.

Second-look financing: Similar to risk-based lending, this process looks at the applicant’s entire credit profile. Second-look lenders typically receive applications after someone’s already been denied a loan.

Waterfall lending: An approval process some lenders use to help more applicants get loan approvals. It uses only one application and one credit pull. However, multiple lenders may see the application throughout the approval process. At FTL Finance, we refer to waterfall lending as our partner program.

Application Process

As your customers navigate the application process, they’ll likely encounter the following terms.

Approved with additional information: An applicant is approved for a loan, pending the submission of documentation, such as proof of income or homeownership. This may also be referred to as conditional approval.

Co-applicant: An additional person added to a loan application to get more favorable terms. This is typically a second homeowner.

Credit profile: A comprehensive summary of a person’s financial history and creditworthiness, which includes payment history and open credit accounts. Some lenders use these, in addition to a credit score, to decide if they will offer financing and which rate they’ll offer. This may also be referred to as a credit report.

Credit score: An at-a-glance look at a person’s financial history. Scores are calculated based on a person’s credit profile but may vary based on who’s calculating the score. Lenders use these to decide if they will offer financing and which rate they’ll offer. They’re also used in pre-approvals and pre-qualifications.

Credit tiers: Levels or categories of credit scores. There are five credit tiers: super prime (720 to 850), prime (660 to 719), near prime (620 to 659), subprime (580 to 619), and deep subprime (300 to 579).

Pre-approval/Pre-approved: This method relies on a hard pull of a credit score (which shows on a credit report) to determine creditworthiness. It is a good indicator of loan approval odds but does not guarantee loan approval.

Pre-qualification/Pre-qualified: This method relies on a soft pull of a credit score (which does not show on a credit report) to determine creditworthiness. It is a good indicator of loan approval odds but does not guarantee loan approval.

Loan Types

Once your customer is approved for a loan, they will be offered a loan option. With some lenders, they may be able to choose the loan option that works best for them. You’ll likely see the following types of loans.

Buy now, pay later (BNPL): An alternative payment method that lets customers pay in equal installments, often without interest or fees — as long as they make payments on time. Unlike most other lending solutions, BNPL only requires a soft credit pull or no credit check, approves most applicants, and has purchase minimums as low as $1.

Installment loan: A financing solution in which a lender loans a lump sum of money to a borrower, who then pays back the amount over time in monthly repayments, or installments. Examples of installment loans include mortgages, auto loans, and personal loans.

Lease/Lease-to-own: A financing solution in which the financing company owns the equipment and the customer makes monthly payments. A lease can last 10 or more years and is typically offered to applicants with poor credit history. A customer does not own the equipment at the end of a lease but may have the option to purchase it. However, with lease-to-own, the customer does own the equipment at the end of the lease.

Promotional credit card: Revolving credit offered to customers with ongoing credit needs, such as paying for a service contract. Contractors partner with lenders to offer promotional credit cards to their customers.

Revolving credit: A line of credit a borrower can borrow against and pay down repeatedly, like a credit card or home equity line of credit (HELOC). It eliminates the need to apply for financing each time they need credit.

Same-as-cash loan (SAC): A lending solution where the customer owes no interest or monthly payments during a set promotional period, typically ranging from 90 days to 12 months. Interest still accrues during this period, but if the customer pays off the principal during the promo period, they will not have to pay interest. This may also be referred to as a deferred interest loan.

Secured loan: An installment loan that is backed by collateral, an item of value that lenders can seize if the borrower fails to pay back their loan. For example, your home serves as collateral when taking out a mortgage.

Unsecured loan: An installment loan that does not require collateral, like a personal loan.

Fees, Rates, and Terms

Nothing in life is free, right? Well, some financing options are, but not all of them. Customer financing involves fees, which the contractor pays, and interest rates, which the customer pays.

You’ll also encounter terminology regarding rates and terms of the loan. Rates are the interest rate the customers will pay, and terms are the length of the loan.

Dealer fee: A fee a contractor pays a lender to give their customer more favorable loan terms, such as a same-as-cash loan or lower interest rate. This fee is typically a percentage of the loan total and can be worked into your overhead cost. This may also be referred to as a buydown fee, contractor fee, discount, or promotional fee.

Note: Some lenders charge dealer fees for all loans. FTL has select loan options contractors can offer customers with no fees.

Fixed rate: An interest rate that remains the same throughout the life of the loan.

Long-term loan: A loan with a repayment period of more than one year. Typically, repayment periods last three-to-ten years, but could be as long as 30 years.

Short-term loan: A loan with a repayment period of less than one year.

Variable rate: An interest rate that can change throughout the life of the loan, typically due to economic conditions.

Understanding customer financing terms can help you guide customers through the process with ease. But you don’t have to memorize them to give your customers a great experience. Keep this glossary handy whenever you need a quick reminder.