SECOND LOOK FINANCING

Consumer financing is categorized into prime, near-prime (also known as second-look financing) and sub-prime credit. The FICO and Vantage credit scoring systems determine these categories, and merchants understanding these credit tiers could be on their way to sales finance success. Depending on the lender, generally a score of 670 and up falls under the “prime category” and helps consumers qualify for the best credit terms. High-prime lenders may only approve customers with a FICO of 780 and up. All lenders aren’t the same; each lender establishes their own credit tiers and criteria for extending credit. And, the longer the promotional or deferred interest (same-as-cash) program, typically 12, 24, 36, 48, 60 and 72 months, the higher the FICO/Vantage score cutoff. Lenders may tighten credit granting from time-to-time to respond to market conditions (as we witnessed during COVID), what they consider higher risk products or services such as jewelry, or to improve their desired financial results. 

Second-look financing offers credit to consumers who may not qualify for prime financing options due to lower credit scores and/or a variety of other factors. There are dozens of credit factors, and include payment history, amount owed, length of credit history, credit mix (mortgage and car payment versus 3 credit cards) and whether one has recently applied for “new credit”. Second-look financing is typically offered after a primary lender has denied the consumer's application. Some second-look lenders may dip into sub-prime territory (down to 550 - 580 FICO), and are a favored second-look provider. The financing category provides a “second chance” for consumers to obtain the desired products and services with good credit terms.

Depending on the lender and market vertical, around 30% of the U.S. population falls into the “near-prime” financing category (580 – 699 FICO). These are not Lease-to-Own (“LTO”) customers, and will qualify for more favorable terms with a second-look lender. Near-prime customers become frustrated when LTO is offered to them as alternative financing behind the primary lender decline; 35%  or more of these customers leave the store without buying. They know they can obtain more favorable financing somewhere else. LTO is reserved for borrowers with “very poor credit” and “no credit”.  LTO uses "lease multiples" instead of an APR, and a $1,000 retail sofa and chair can cost the consumer from $2,000 to $3,000 on a lease purchase contract.  LTO payments are high, and if customers pay to term (12, 18 or 24 months), they’ll end up paying an effectual APR of 300%, or higher.  

Companies successful in adapting to second-look financing pay attention to their brand first.  How is my brand perceived? Am I offering the right financing program to my customers? How does my brand build trust with my customers, and does it create value and solve problems?

Second-Look lenders require that the merchant share in the risk by charging a risk fee, or Merchant Discount Rate (“MDR”), and should be accounted for in the retail markup. These MDR’s will vary by lender and will be tempered by how low they approve credit in the near-prime and sub-prime categories. The further down the FICO scale the lender approves will usually result in higher MDR’s. MDR’s are also influenced by any promotions a merchant may request, which typically include 6 and 12 month deferred interest programs, and sometimes a non-promotional program. The non-promo MDR is the pure risk fee.

Importance of Second-Look Financing

Possibly, the single largest growth opportunity for retailers today are consumers classified as near-prime to high sub-prime borrowers. Their credit scores are higher than those of most subprime borrowers, but lower than those of prime. One of the most significant advantages of second-look financing is its ability to facilitate your access to an additional customer base. By offering credit to individuals in this credit group, you can capture a previously underserved market segment. 

When you provide consumers with a second chance at financing, you demonstrate a commitment to their financial well-being. This can foster a sense of loyalty among your customers, encouraging them to return to your business in the future.  In a competitive marketplace, offering second-look financing can set your business apart from the competition. It can be a compelling selling point that attracts customers who might otherwise choose your competitors.