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Why Retailers Offer Lease-to-Own Financing to Their Customers

June 19, 2023

5 min read

Lease-to-own (LTO) financing is a type of non-prime financing that enables 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.

LTO is a popular option among customers who are establishing or rebuilding their credit. These customers typically do not get approved for prime lending options, like store credit cards or buy now, pay later providers.

Why is lease-to-own financing gaining popularity?

According to ChargeAfter, retailer adoption of lease-to-own financing is expected to increase 1.7x this year.

  • More customers are facing rejection when they apply for financing from primary lenders. 30% of lenders tightened their credit standards in Q1 2023, according to Reuters.

  • Customers with credit scores under 660 have already had a difficult time getting approved for prime financing options like most store credit cards and buy now, pay later providers (BNPLs), yet they make up nearly 50% of U.S. consumers. LTO provides a way for non-prime customers to pay over time for larger purchases.

  • 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.

  • Customer usage of LTO is on the rise. KeyBank estimates LTO is now a $45B market, with LTO provider revenues up 29% since 2020.

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.

Unlocks a new customer segment

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 finance a purchase with you. These are customers with credit scores below 660, or customers with no credit at all.

This group represents 47% of U.S. consumers:

  • 9% - near-prime consumers with credit scores between 600 and 660

  • 15% - sub-prime consumers who have credit scores under 600

  • 23% - consumers who are credit invisible or have unscorable credit.1

Increases conversion without impacting margins

Prime financing options like store credit cards and BNPLs typically 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:

  • Underwriting

  • Customer service

  • Returns

  • Collections

You can still maintain the same profit margins on each sale while offering a flexible payment 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.

Retailers typically see a 10% - 25% improvement in conversion rates after implementing lease-to-own financing.2

To maximize conversion impact, it’s important to fully integrate financing into the end-to-end shopper journey, in-store and online.

Some financing companies provide plug-and-play eCommerce integrations and co-branded marketing support.

Creates loyal, repeat customers

Customers are typically approved for more than they plan to spend at once, which gives you the opportunity to get customers to come back and spend more.

At Koalafi, 60% of customers are approved for more than they spend on one shopping trip.3 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.

Higher approval rates lead to positive brand experiences

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.4

Creates an inclusive shopping experience for customers

No one wants to get rejected.

In-store, it’s uncomfortable and awkward for your sales associates and customers. Online, the customer is one click away from shopping elsewhere.

Three of five non-prime customers who financed a purchase with Koalafi wouldn’t have made a purchase if there wasn't a financing option for them.

LTO creates an inclusive shopping experience for people of all financial backgrounds. So when more 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.

Empowers customers to select the best payment option for their needs

Customers make lease payments over 12 or 24 months and can save by paying off their lease early.

For example, customers who pay off during our 90-day purchase option period only pay the retail price plus any fees that apply to obtain ownership of the merchandise. After the 90-day early purchase period, the customer can still pay off their lease and receive a discount on leasing costs.

Regardless of customer credit, the 90-day purchase option is a great incentive for shoppers who want to save on upfront costs while spreading out their payments over three months.

Gives your customers opportunities to grow their credit

Lease-to-own financing can be a great way for customers to improve their credit. Some financing providers like Koalafi reports customer payments to major credit bureaus which may help improve credit scores when customers make on-time payments.5

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.

A better financing experience is better for everyone

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 customers, costs nothing for you to offer, may provide customers an opportunity to improve their credit score, and allows for early payment savings.5 By offering 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.

Want to learn more about our non-prime financing options? Book a meeting with us.

1Consumer Credit Card Market Report, Bureau of Consumer Financing Protection, 2021

2Industry benchmarks

3Proprietary Koalafi data, 2023

4Koalafi proprietary data, 2024

5You may have an opportunity to build credit by making on-time payments over the entire agreement term. Koalafi reports positive and negative payment history to multiple credit bureaus.

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Koalafi offers Lease-To-Own and Lending solutions. Loans issued by The Bank of Missouri, serviced by Koalafi