Car dealerships have stepped up. They have come a long way from the days when they were glorified parking lots. Not only is buying from a dealership safer than buying private. You can also get great deals on more than reasonable terms.

One of the most important functions of a dealership is financing. It is here, too, that most drivers experience the biggest benefits. Remarkably, the days when you would only make use of dealer finance if you absolutely could not get a loan with your bank are long gone.

In most cases, car finance with a dealer is not just your most comfortable, but also your best option.

What about In House Financing?

In some instances, you will have heard the term in house financing mentioned in relation to dealer finance. Although by no means the only way that dealerships operate, it has become extremely popular of lately.

In this article, we’ll explain what in house financing means, and what the pros and cons of this approach are.

When we talk about dealer finance, we usually don’t care how it works. What you really want to know is how much it’s going to cost you. Alternatively, if your credit rating is sub-par, you may first want to find out if a loan is possible at all. Don’t forget that many banks and even some credit unions won’t even touch someone who’s had financial difficulties in the past. And online car finance is still highly questionable at the moment.

But if you look underneath the surface, you will find that there are two distinct approaches to dealer finance.

The dealer as a middle man

In the first approach, the dealer acts as a middle man between you and the banks. They ask for offers from different financial institutions and then pick out the most advantageous one. This can be a great way for you to finance your car.

For one, banks will be more willing to lend to the dealer, even if your credit score is below par, because the dealer will take responsibility in case of a default. And because dealers will usually bundle together different loans, their total credit sum will be higher – which allows them to get better rates.

Dealer finance method 2: In House financing

Thanks to the approach described above, dealerships have managed to essentially take over from banks as the primary financing partners for car loans. But of course, banks are still part of the equation, as they still provide the necessary cash.

And so, the risk car dealerships are willing to take on is not unlimited. Although you can still get loans this way with a mediocre credit rating, there is definitely a limit to how low your rating can be until the bank calls the whole thing off.

Enter the second approach to dealer finance: In House Financing.

With this method, the dealership itself provides the cash out of its own pockets. There is no meddling by bank managers and there may not even be a credit check anymore. The dealership is essentially free to set its own terms.

This opens up a lot of options which simply weren’t possible with traditional dealer finance, let alone an old-fashioned bank credit.

Benefits of In-House Finance

Let’s take a closer look at these options to show you why In-House Finance may be of interest to you.

Essentially, in-house financing doesn’t entirely turn the process around. From the outside, it may be almost invisible. It just makes it a lot more enjoyable and less cumbersome.

In House Car Financing Benefit #1: Bad Credit

It’s not that bank managers are all bad people. They’re not. They just really hate taking risks. And if you’re considered a risk rather than an asset, they would rather not do business with you.

In itself, this is understandable. The problem is that banks’ definition of what constitutes a risk has become more and more restricted. Whereas, in the past, your personal connection to your contact person could override the numbers, this is no longer possible today. Every employee is bound to strict rules to which there can be no exception.

What this boils down to is that you can almost forget about getting car finance for bad credit with a bank.

In-House financing is different.

Dealerships are not bound by the same legal requirements as banks. They also make money on the car, which means they can take a little risk with the loan. And should push come to shove, they can always reclaim the car as collateral and thereby limit their loss.

If you are looking for a bad credit car loan, In House dealer finance may be your best option at present.

In House Car Financing Benefit #2: No Credit History

Could there possibly be something worse than a bad credit rating? There can.

Customers with no credit history whatsoever are the ultimate red rag for most financial institutions. Bad credit means there is a calculable risk in taking you on as a customer. But no credit history at all means that the risk can not be computed at all. There is no way of telling whether you’d make for a good or a bad debtor.

And so, the young have traditionally found it hard to get any kind of finance, let alone a car loan.

Here, too, In-House Financing opens up new possibilities. As with a bad credit history, dealerships are not as threatened by a default as a bank would be. Admittedly, students and younger people are by no means their favourite target group. But there is no reason why they couldn’t take them on, under certain terms and conditions.

In House Car Financing Benefit #3: Process optimisation

Traditional bank loans used to be hard to come by. The entire process was sluggish and unpleasant, from credit checks and distrustful questions to endless paperwork formalities.

In-House Financing, meanwhile, feels like a vacation. Everything is so much simpler:

• The amount of information you will need to provide is a lot more manageable. Often, the dealer will only need to know a handful of key questions: Your income, your expenses, your debt.
• Rather than rejecting you outright because of a bad credit rating, the dealer will begin with how much you can afford to pay each month – and then use that number to determine the length of the loan. This makes it possible even for those with very limited means to fulfil their contractual obligations.
• The process is breathtakingly fast. After you’ve provided the dealer with the relevant information and established a possible payment plan, you can usually choose from the selection of cars available at the showroom. If all goes well, you could be driving home in your new car on the same day.

In House Car Financing Benefit #4: Great cars

Although the bank industry loves pointing the finger at In-House Financing, there is nothing disreputable about it. There have been, over the years, remarkably few incidents. Certainly, no more than with any other kind of dealership, all of which have significantly improved their image.

So if you step into a dealership with In-House Financing, you may be surprised to find a wide range of great-looking, popular cars. You certainly wouldn’t be able to tell from the cars on display what kind of financing they are offering.

Not only will you be able to choose from some of the most in-demand models. The condition of these cars will also be excellent. There is no reason whatsoever to suspect foul play here. Dealerships today are among the most professional companies in the business, always eager to shed their black sheep reputation.

In House Car Financing Benefit #5: One transaction only

We’ve left the most obvious benefit for last. With In-House car Financing, you can wrap ever single aspect of your purchase up in a single transaction.

Effectively, you can step into the dealership and take care of three things at once:

• Buying your next car
• Selling your old one as a part exchange
• Securing financing through in house financing

Compared to the old system, where you would sometimes be required to work with three different partners, this is clearly a major advantage.

In-House Financing: Higher rates

Now, we won’t beat around the bush: In House Financing will usually be fairly expensive. Certainly, the rates you’ll pay will sound almost astronomical if you’ve so far been used to regular bank loans.

However, you need to put things into perspective:

• If critics argue that in house financing is a lot more expensive, the question is: Compared to what? The reason why bank loans have far lower rates is that they are offered only to people with a higher credit rating. The more risky a loan gets, the more expensive it will get. So it is self-evident that in House Financing is going to charge you more than a bank loan.
• As with everything, In House Financing forces you to prioritise. If getting behind the wheel is vitally important to you, then it may be justified to pay high interest rates on your loan.
• Finally, if you do find that you need to have a car even with financial difficulties, the most important thing is to be able to afford the monthly rates. It is unrealistic to argue that In House Financing forces people into overly long loan arrangements. The way things are, this is by far the best way to ensure you can actually pay it off. Your monthly contributions will always be such that you should be able to contribute. This lifts a heavy burden from the shoulders of many.

What about black boxes?

There has been a lot of discussion in the media about the merit of black boxes. These devices are almost universally installed in cars bought through In House Financing. Their goal is to ensure compliance with the agreed-upon payment goals.

The way these devices work is simple. At the end of each month, you make your loan payment. In return, you receive a code which you then enter into the box. This will keep the device engaged and the car drivable. If you do not make the payment, the car will be blocked and you will no longer be able to use it.

Many have voiced violent protests at this approach.

But really, it’s how you look at it.

The alternative in the past was often to immediately repossess the car if a customer was unable or unwilling to pay. With a black box, the payment can simply be made at a later date.

Effectively, a black box introduces a new way of paying for your car. For the same reason, some refer to them as Pay2Go. What’s more, no lock down will ever instantly go into effect, so you will always be able to take the car home with you, arrange the financing and continue using it.

As a summary, In-House Financing has its drawbacks. But for many in the UK with a problematic credit past, they may be a godsend. If you are interested in them, don’t reject them outright. Instead, inform yourself, ask for an offer – and then take the right decision.