Glossary: Waterfall finance

What does waterfall mean in finance?

Waterfall finance is a model wherein shoppers apply for consumer financing through a single application and undergo an automated tiered and cascading evaluation.

This evaluation systematically sifts applicants through different lender categories, starting with prime lenders. If applicants meet the criteria for prime lending, they are approved at that level. For those who do not qualify for prime lending, the waterfall financing process then directs them to near-prime lenders. Finally, if eligibility is not met with near-prime lenders, the process further cascades down to subprime lenders or lease-to-own financing options.

Key elements of waterfall finance:

  • Automated tiered evaluation: Waterfall finance employs an automated process that categorizes applicants into different tiers based on their creditworthiness. This tiered evaluation determines the eligibility for various lending categories.
  • Prime lenders: Applicants with strong credit profiles are initially directed to prime lenders. These lenders offer favorable terms and conditions to creditworthy consumers.
  • Near-prime lenders: If applicants do not meet the criteria for prime lending, the waterfall financing structure guides them to near-prime lenders. Near-prime lenders cater to individuals with slightly lower credit scores but who may still qualify for competitive financing terms.
  • Subprime/lease-to-own options: For applicants who do not qualify for prime or near-prime lending, the waterfall finance process leads them to subprime lenders or lease-to-own financing. This tier serves individuals with less favorable credit profiles, providing alternative financing solutions.

Application of waterfall financing within consumer financing:

  • Efficient approval process: Waterfall finance streamlines the approval process for shoppers applying for financing at the point of sale. It ensures that applicants are directed to the most suitable financing option based on their creditworthiness.
  • Optimized customer experience: By automating the tiered evaluation, waterfall financing enhances the customer experience by swiftly connecting shoppers with the most appropriate lenders, optimizing the likelihood of approval.

Benefits of waterfall finance in consumer financing:

  • Maximized approval rates: Waterfall financing maximizes approval rates by systematically directing applicants to lenders matching their credit profiles, increasing the chances of success.
  • Tailored financing solutions: Merchants deliver tailored financing solutions by offering prime, near-prime, and subprime/lease-to-own options, catering to a diverse range of consumers with varying credit histories.
  • Efficient risk management: Enables efficient risk management by categorizing applicants based on creditworthiness, allowing lenders to align their risk exposure with the appropriate financing terms.

Waterfall finance optimizes the financing journey for shoppers by automating the application process with omnichannel lending and directing them to lenders tailored to their credit profiles, ensuring a seamless and efficient financing experience.