The difference between loan and lease-to-own financing

The difference between loan and lease-to-own financing and how do I know which is right for my business?

Loans and leases are valuable sales tools for your business, because they both enable your customers to split a larger expense into smaller manageable payments. When customers don’t have to pay a lump sum upfront, they are not only more likely to make the purchase, but can also get exactly what they are looking for, which means larger tickets for you. While they serve a similar purpose, there are also some important differences that you should understand when considering which to offer your customers (hint: offering both ensures you have payment options for nearly any customer).

Installment loans

How it works: With an installment loan, a borrower gets a lump sum upfront (called the principle), that they pay back to the lender in regular payments. In point-of-sale financing, the loan principle goes directly to the merchant to cover the cost of the purchase. To pay back to the loan, the borrower makes monthly payments over a finite number of months, such as 6, 12, 36, etc. There is a finance charge, expressed as an annual percentage rage (“APR”), which is based on the principal amount borrowed (the upfront amount borrowed) and added to the monthly payments. 

Who it’s for: There are a wide range of loan options available for customers with excellent to near-prime credit. However, customers with poor credit may have a harder time getting approved. Customers without a credit history are unlikely to be a good fit for a loan.

Businesses who offer higher ticket items, usually $200 or higher, can help overcome price objections by offering loans.

What to look for: There are some variations in loan offerings that you should be aware of. You can also check out our buyers' guide for more comprehensive tips on what to look for in a financing provider.

1. Promotional interest periods: 0% interest, deferred interest, or no payment periods (where the interest still accrues but isn’t charged) are sometimes available and can help borrowers save.

2. Other borrower fees: Be aware of other borrower fees, such as an upfront fee or an early repayment fee.

3. Merchant fees: Merchant fees are often charged to offer loans. Typically, the more appealing the consumer offer is (such as 36 months 0% interest), the higher the merchant fees will be.

4. Collateral requirements: If no collateral is required the loan is considered “unsecured.” A mortgage where a home is collateral if the mortgage isn’t paid is an example of a “secured” loan.

Leases (often called “lease-to-own")

How it works: A lease is a type of non-prime financing. With a lease, a financing company purchases the item from the merchant, pays the merchant upfront, and leases the item to the customer over a fixed period. The customer still gets to use the item but doesn’t technically own it until they have made their last payment to the financing provider. Instead of an APR, the customer agrees to a total amount they will pay the lender for the leased item, which is split into regular payments over a fixed period, such as 12 or 24 months. This means the customer always knows the maximum amount they will have to pay, which gives them peace of mind.

Who it’s for: Leases are a good fit for customers who are establishing or building their credit. Even customers without credit may get approved for a lease. Nearly 1 in 2 U.S. consumers fall into this category due to a wide variety of reasons, such as lack of credit history or an expensive life event such as a divorce or injury.

Offering lease to own or “no credit” needed financing is a great way to invite a wider customer base to explore what you have to offer. It's important to note that "no credit" needed does not imply no credit check.

What to look for:

1. Early purchase options: Many providers will offer customers the ability to pay the original sticker price (in addition to other fees such as an upfront payment or early purchase fee) to significantly save.

2. Credit reporting: Ask if the provider reports payment progress to a credit bureau. Credit reporting is a great way for your customer to establish and build their credit.

3. Other borrower fees: Understand if the borrower is charged other fees, such as early repayment fee or an initial payment.

4. Merchant fees: While it’s a good idea to understand the merchant cost, lease options are typically more affordable for the merchant than loans. It’s not uncommon for there to be no cost to the merchant to offer leases.

While loans and leases are both means of paying for larger purchases over time there are some important differences to be aware of. Offering both types of products ensures you have flexible payment options available for any customer interested in your offerings.

Regardless of which options you choose, make sure you have educational materials that clearly explain how it works, and work with providers who make it clear and simple for your team and customers to understand.