Learn about the pros and cons of using a contractor for home improvement financing and explore alternative options. This article covers the rates, funding speed, and pressure to overspend associated with contractor financing, as well as other financing options like home equity loans and personal loans.
by Maria Laus
Questions Answered in this Article
- What factors determine whether you qualify for a loan through a contractor?
- “Your credit profile and financial information are the primary factors determining whether you qualify,” with borrowers with good credit usually getting the lowest rates.
- Can a contractor subsidize a loan to lower your interest rate?
- Yes, “some contractors may subsidize the loans by partnering with financing companies, which can effectively lower your interest rate.”
- How quickly can loans through contractors be approved and funded?
- According to David Zalik, the founder and CEO of GreenSky, “the platform can approve borrowers in mere seconds and provide instant access to funds.”
- What are some alternatives to contractor financing for home improvement projects?
- Home equity loans and lines of credit, personal loans from direct-to-consumer lenders, and paying with cash are all alternatives to consider.
- How can you avoid overspending when considering a loan offer while a contractor is at your residence?
- Tess Downing, a certified financial planner, recommends planning the project beforehand by establishing a solid budget and obtaining bids from multiple contractors to determine the cost before searching for financing options.
Should You Get a Home Improvement Loan From Your Contractor?
If you’re looking for home improvement financing, using a general contractor who offers such services may seem hassle-free, especially if they’re already on-site and ready to begin the work as soon as you pay them.
However, it’s important to note that contractors who offer loans typically collaborate with third-party providers who specialize in home improvement financing. Despite the advantages of this arrangement, it’s crucial to remember that even a reputable contractor may not be able to provide you with funding that aligns with your specific needs. Therefore, it’s wise to explore other options before making a decision.
This article provides insights into contractor financing choices and suggests alternatives worth considering.
Contractor Financing: Rates and Funding Speed
Contractors often provide unsecured personal loans that do not require you to have equity in your home or use it as collateral. Instead, your credit profile and financial information are the primary factors determining whether you qualify and the rate you receive, with borrowers with good credit usually getting the lowest rates.
While this lack of collateral means that a lender cannot seize your property if you default on the loan, it could also lead to a higher interest rate, according to Jovan Johnson, a certified financial planner in the Atlanta area.
Some contractors may subsidize the loans by partnering with financing companies, which can effectively lower your interest rate, according to David Zalik, the founder and CEO of GreenSky, a platform owned by Goldman Sachs that facilitates loans through contractors.
Additionally, some loans may come with zero-interest introductory periods for borrowers with excellent credit, which Johnson believes can be a good option if you’re confident you can repay the balance during the promotional period.
Loans are Funded Fast
Opting for a loan through your contractor can lead to a quicker start to your project since the contractor can begin work as soon as they know the funds are available. Moreover, unlike home equity loans and lines of credit, the lending partners of contractors typically do not require an appraisal.
According to David Zalik, the founder and CEO of GreenSky, the platform can approve borrowers in mere seconds and provide instant access to funds, allowing you to start your project without any waiting period after receiving a quote.
However, Trent Porter, a certified financial planner based in Durango, Colorado, stresses the importance of comparing loan offers before accepting one. Porter recommends pre-qualifying with different home improvement lenders to preview your potential loan amount and rate with a soft credit check that does not affect your credit score.
Zalik notes that pre-qualified GreenSky offers are valid for 60 days, giving you ample time to compare them with other loan options.
Avoiding Overspending: Planning Your Project and Exploring Other Financing Options
Like other point-of-sale financing alternatives, receiving a loan offer while the contractor is at your residence may create a sense of urgency that could push you to initiate a project before you’re prepared or spend more than your original plan.
Jovan Johnson, a certified financial planner based in Atlanta, notes that he dislikes how it places the client in a pressured situation where they cannot step back and assess their choices.
To alleviate this stress, Tess Downing, a certified financial planner at Complete View Financial in San Antonio, recommends planning the project. Begin by establishing a solid budget and obtaining bids from multiple contractors to determine the cost before searching for financing options.
If you’re considering a loan through a home improvement firm, she suggests getting two or three estimates you’re comfortable with before pre-qualifying.
Alternatives to Contractor Financing: Home Equity Loans, Personal Loans, and Paying with Cash
In addition to your contractor’s loan offer, exploring other financing options is wise to obtain the best rates and terms.
Two options are home equity loans and lines of credit, which usually offer single-digit interest rates and extended repayment periods that make monthly payments manageable. The interest on home equity financing may be tax-deductible if you use the funds for home improvements.
HELOC rates are variable, while home equity loan rates are fixed. However, rates for both have been increasing for approximately a year, so if you must choose between the two, Trent Porter, a certified financial planner from Durango, Colorado, suggests locking in a fixed-rate home equity loan now refinancing later if interest rates decline.
If you lack equity or prefer a no-collateral financing option, compare personal loans from direct-to-consumer lenders. Like loans offered through contractors, you can usually pre-qualify for a personal loan online, which can help you determine whether your contractor’s offer is reasonable.
Alternatively, pay with cash to avoid interest charges entirely. If you must make repairs, consider tapping into your emergency fund, advises Porter. A slow roof leak may be an emergency, especially if it leads to costly repairs in the future.
Summary
- Home improvement contractors may offer financing options, but they typically collaborate with third-party lenders who specialize in home improvement financing.
- Rates for contractor-provided loans are tied to credit, not equity, and borrowers with good credit usually get the lowest rates.
- Contractor-provided loans are usually unsecured personal loans that do not require collateral, but this lack of collateral may result in a higher interest rate.
- Loans through contractors are funded fast, which can lead to a quicker start to your project, but it’s important to compare loan offers before accepting one.
- Pressure to overspend is a common issue with point-of-sale financing options, so it’s important to plan the project, establish a budget, and obtain multiple bids before searching for financing options.
- Other financing options worth considering include home equity loans and lines of credit, personal loans from direct-to-consumer lenders, and paying with cash.
- Home equity loans and lines of credit usually offer single-digit interest rates and extended repayment periods, while personal loans from direct-to-consumer lenders allow you to pre-qualify online.
- Paying with cash avoids interest charges entirely, and tapping into your emergency fund may be a viable option for necessary repairs.
