February 2, 2023
3 min read
As a point-of-sale financing company that provides payment plans for people establishing or building their credit, retailers often tell us that their customer base is not non-prime. But from our experience working with 15,000+ retailers and their customers, we’ve learned that there are many common misconceptions about where consumers may be on the credit spectrum.
So who are non-prime and no-credit consumers, and why are they such an important segment for retailers?
Non-prime consumers have credit scores below 660, unscorable credit, or no credit score at all. They represent 47% of the American population.
Divorce complications, medical bills, and student loans can impact credit scores in the blink of an eye.
Those new to credit, like recent college grads, new members of the workforce, and immigrants may be considered “credit invisible”, or have too thin of a credit file to be scored by the 3 major credit bureaus (TransUnion, Equifax, and Experian).
As more consumers turn to point-of-sale financing for larger purchases, it’s important for retailers to have payment options for those establishing or building credit.
It’s a common misconception that non-prime consumers have lower income levels and won’t shop at stores that sell higher-end products. Someone making over $100,000 per year could have a lower credit score than someone making $25,000 per year.
Credit scores are complex calculations based on a variety of factors that have nothing to do with income, including:
Length of credit history
Amount of debt used
Amount of debt available
Number of credit inquiries made
Customers establishing or rebuilding their credit need other payment options.
Here’s what a customer who financed a 3-piece sectional and stools told us:
My credit is kinda crappy (poor choices when younger) and I'm still rebuilding my credit. Because of Koalafi, I was able to purchase a big couch for my living room and buy dining room chairs for my kids.
- Stephanie H
Gen Zers and Millennials are building credit while establishing their careers and paying off debt from student loans, mortgages, and auto loans.
Although Gen Z and Millenials are viewed as the “next generation” of shoppers, they account for nearly 60% of all point-of-sale financing applications.
This is a generation of omnichannel shoppers. They expect a frictionless checkout experience, in-store and online. Their path to financing a purchase should be easy and transparent.
Imagine 100 people apply for financing and 47 get declined because their credit is too low.
Of the 47 who were declined, 28 (60%) will not go on to make a purchase, according to a customer survey we ran in November 2022.
At a $1,000 average order value, that’s $28,000 in missed revenue by not having an alternate financing option for these customers.
But it's not just revenue that’s impacted here. Customer experience and brand equity is at risk: 22% of consumers who get declined for financing leave with a more negative perception of that retailer.
Luckily, there are (2) alternative, non-prime financing options retailers can offer to non-prime consumers:
Non-prime consumers with credit scores from 659 down to 600 (and sometimes lower) typically qualify for a second-look loan. This represents over 9% of US consumers.
Second-look loans give consumers the option to pay over time for up to 36 months. However, they typically have higher interest rates and financing costs compared to prime options.
Consumers with credit scores below 600 or customers with no credit at all are more likely to qualify for a lease than a second-look loan. This group represents 38% of US consumers: 15% with a sub-600 credit score and 23% who are “credit invisible” or have unscorable credit.
Let's compare the (3) types of financing retailers can provide:
Learn more about non-prime financing options in this guide.
Koalafi offers Lease-To-Own and Lending solutions. Loans issued by The Bank of Missouri, serviced by Koalafi