March 27, 2023
5 min read
As a retailer, it is important to consider all of the financing options available to your customers. One such option that is gaining popularity is lease-to-own (LTO) financing.
This type of alternative financing allows customers to lease an item from the financing company and make payments for it over time. The customer owns the item after it’s paid off.
Lease-to-own financing gaining popularity among retailers for a few reasons:
It provides a path for your sub-prime or credit-invisible customers to pay over time. Customers with credit scores under 600 have a difficult time getting approved for traditional financing options like store credit cards and buy now, pay laters (BNPLs), yet they make up nearly 40% of U.S. consumers.
Consumers' willingness to spend dropped 13% from Jan 2022 to Feb 2023 due to inflation. Budget-conscious consumers are turning to lease-to-own financing to make larger purchases more attainable.
Retailers are looking for new ways to attract customers and increase conversion without deep discounts or other tactics that erode margins.
Capturing Gen-Z market share is critical to growth, but 61% of Gen-Zers don’t have the credit for traditional financing options. LTO gives them an option.
Demand for LTO has increased as more customers use it as a payment option. Keybanc estimates LTO is a $45B market.
Now let’s consider the ways it can grow your bottom line so you can make an educated decision about whether it’s right for your business.
Not all customers have a good credit score or a stable income, making it difficult for them to obtain financing through a BNPL provider or a store credit card.
Offering lease-to-own financing opens up a new market of customers who may have previously been unable to purchase from you. These are customers with credit scores below 600, or customers with no credit at all.
This group represents 38% of US consumers:
15% who have a sub-600 credit score
23% who are credit invisible or have unscorable credit.*
Traditional financing options require retailers to pay a percentage of every financed purchase. Lease-to-own financing won’t cost you any transaction fees.
Plus, the financing company takes care of all the costs and risks associated with the financing, including underwriting, customer service, returns, and collections.
You can still maintain the same profit margins on each sale while offering a flexible financing option to your customers. In fact, offering lease-to-own financing can increase profitability in the long run. With more customers able to finance a purchase, your conversion rate will increase and acquisition costs will decrease.
To optimize conversion impact, it’s important to fully integrate financing into the end-to-end shopper journey. Some financing companies can provide co-branded marketing materials and eCommerce widgets to help you effectively promote financing.
Customers are typically approved for more than they plan to spend at once, which provides you with the opportunity to get customers to come back and spend more.
At Koalafi, 76% of customers are approved for more than they spend on one shopping trip. And over half of our customers have 25% more in unused financing available to them.
Your financing company should provide reporting on which customers have more to spend, and how much they have to spend so you can promote other products to increase revenue per customer and total lifetime value.
When someone finances a purchase, their opinion of the financing company often reflects how they feel about the retailer.
Unsurprisingly, nearly a quarter of customers who get declined for financing report having a more negative perception of the retailer.
Offering LTO can reduce the number of negative brand experiences because 70% - 90% of applicants typically get approved.
No one wants to get declined.
In-store, it’s uncomfortable and awkward for your sales associates and customers. Online, the customer is one click away from shopping elsewhere. In fact, 60% of non-prime customers who financed a purchase wouldn’t have made a purchase if a financing option wasn’t available to them.
Lease-to-own financing creates an inclusive shopping experience for people of all financial backgrounds.
When people are empowered to get the things they need now without the fear of rejection, they have confidence in your brand and will shop with you again and again.
Customers can make lease payments over 12 or 24 months, and they are incentivized to pay off their lease early.
For example, customers who pay off a Koalafi lease within 90 days only owe an initial payment (varies by state) + retail price, and at times an early purchase fee. After 90 days, the customer can still pay early for an early buyout discount.
Regardless of customer credit, this is a great incentive for shoppers who want to save on upfront costs while breaking out their payments over 3 months. Two out of five Koalafi customers pay off their lease within 90 days, making this payoff option cheaper than a credit card or personal loan.
If you’re looking to drive more traffic and conversions, promoting the early payment option is an effective approach.
Lease-to-own financing can be a great way for customers to improve their credit. When customers make on-time payments, financing providers like Koalafi report these payments to the major credit bureaus, which can help improve your customers' credit scores.
This means that customers who use lease-to-own financing responsibly have more opportunities to obtain better financing options in the future, like a mortgage, auto loan, or deferred interest financing options.
Help your customers improve their financial health and build a more positive reputation for your business.
Offering lease-to-own financing as a payment option can provide numerous benefits for both you as a retailer and your customers.
It provides a flexible, longer-term financing option for non-prime and no-credit customers, costs nothing for you to offer, helps customers improve their credit score, and allows for early payment savings.
By considering this payment option, you can attract new customers, increase sales, and promote financial health for your customers.
When a customer is happy with their financing provider, they’re happy with your brand.
Customer Support
Mon-Fri 8:00am-9:00pm ET
Sat 8:00am-8:00pm ET
Business Support
Mon - Sat: 8:00am-10:00pm ET
Sun: 9:00am-9:00pm ET
365 days a year
Koalafi offers Lease-To-Own and Lending solutions. Loans issued by The Bank of Missouri, serviced by Koalafi