Point of Sale

Point of sale financing is becoming a very important aspect of our financial system. When a consumer is ready to make a large purchase, it is often financed. Mortgages, Cars and Education are some of the biggest items financed in a person’s life. But what about medium size purchases such as a medical procedure, home improvement or a debt consolidation loan?

What is point of sale financing?

Point of sale financing is when a purchase is financed before and perhaps during the purchase process. Point of sale financing is becoming very popular because of the technical advances of mobile computing and cloud computing.

When a consumer is buying a large appliance for their home, a point of sale financing situation presents itself. A television, refrigerator, washing machines and sometimes furniture sets are all financed either through a financing company or the manufacturers themselves.

When you step into a showroom or a dealership, financing options are advertised all over the place to help you make your purchase decisions.

These financing options are often in the form of an installment loan. An example of this is that when you purchase a vehicle, you can finance the purchase by taking out a 36, 48 or 60+ months loan.

These loans are often offered by the automotive manufacturer themselves to help encourage sales. These loans are also often secured or backed by the cars themselves. In other words, if you no longer can afford to pay back the car loan, the manufacturer has the rights to repossess the car and recuperate their losses.

Point of sale financing extends beyond automobiles and kitchen appliances. Sometimes a medical procedure, home improvement jobs are also financed. For instance, if you want to install a solar energy system with panels, batteries and inverters, the solar manufacturing companies sometimes will finance the project, but there are speciality financing companies that will finance the entire job.

And as usual, these point of sale financing products are almost always in the form of an installment loan. Sometimes, certain financing companies will offer you a line of credit to draw upon for a larger home improvement project where the true cost is not certain until the project is near its maturity.

Point of Sale Financing - Collateral

In most cases, a point of sale financing loan requires the lender to capture information about the collateral, or the item to be financed. For example, if you are taking out a car loan, most aspects of the car need to be captured and vetted through a third party data provider to ensure the equity value of the car doesn’t outpace the loan amount.

In a home improvement project, say a solar project, the attributes of the solar equipment needs to be captured so the financing company can properly evaluate the cost of the equipment they are financing and their potential depreciation curve to make sure the loan amount is appropriate to the entire equipment cost plus labor cost.

In ground pool projects and their financing projects are also unique in the sense that the financing company will put a lien on the home where the in ground pool is attached to. In order to secure their loan or lower the risk of their loan, the financing company will leverage the equity of the home or the home value to ensure that if the homeowner stops paying their installment loan, the financing company will have a claim against their entire home. Thereby forcing the homeowner to continue to pay their debt.

Point of Sale Financing - Originations Process

Point of sale financing can take on a variety of forms of application process. Some may not be required to take in collateral information, some might require extensive documentation of the collateral in question.

The loan and financing origination system should have the ability to customize the onboarding form to take in account whatever information that needs to be captured and sent to third party vendors to retrieve value or equity analysis of the equipment, car or home.

If you are building or renting an origination system, make sure the system is flexible enough to be modified to take into account additional information needed to provide an appropriate credit risk decision and loan amount.

Point of Sale Financing - Decisioning Process

With point of sale financing, there are multiple decision points.

Applicant and co-applicant underwriting: Sometimes both spouses need to be underwritten for a large purchase such as a car or a large home improvement project. Both applicants' information will need to be collected and adjudicated. Overall household income should be considered as well.
Merchant underwriting: Financing companies also need to verify the merchants they are working with. Most of the time, financing companies are leveraging the merchants to bring applicants to their financing portal. If merchants aren’t properly vetted, the merchant could perform an undesirable job that leads to customer satisfaction issues and worse disputes could arise. Lastly, there have been instances of merchant related fraud where the merchants are creating fake applicants to get their phantom jobs funded.
Collateral analysis: Financing companies must understand the collateral in question. For example, a pool, solar system and other cost of material all need to be entered into the application or before the first batch of funding is to be released. This is to ensure that the financing amount is appropriate to the cost of material, equipment and labor. The financing companies don’t want to either over or under fund a project that could lead to unhappy customers or unmotivated merchants to perform the work.

LendAPI's all in one system

LendAPI has designed a product builder where financing companies can create their form. The system will also connect to any number of third party systems to vet out merchants, consumers and collateral. We will work with you every step of the way to make sure the initial application captures the correct information and produces a sound credit risk decision.

For more, please visit us at www.lendapi.com or write to us at info@lendapi.com