Using a general contractor who offers home improvement financing sounds convenient, especially if they are standing in your kitchen as you pay them.
Contractors who provide loans usually work with third parties who specialize in home improvement financing. While there are benefits to the arrangement, even a highly recommended contractor may not provide you with financing that suits your needs, so it pays to shop around.
Here’s what to know about contractor financing options and options to consider.
Rates are tied to credit, not equity
Many contractors offer unsecured personal loans, which do not require you to have equity in your home or use it as collateral.
Instead, your credit profile and financial information determine whether you qualify and what rate you’ll get. The lowest rates go to borrowers with good credit.
Collateral doesn’t mean a lender can’t take your property if you fail to repay, but it also means rates can be higher, says Jovan Johnson, an Atlanta-area certified financial planner.
Contractors can subsidize loans through their financing partnerships, effectively lowering your interest rate, says David Zalik, founder and CEO of GreenSky, a platform owned by Goldman Sachs that helps contractors provide loans. can reduce.
And some loans have zero-interest introductory periods for borrowers with strong credit, which Johnson says can be ideal if you’re confident you can pay off the balance during the promotional period.
Loans are funded faster
A loan through your contractor can also mean a faster start on your project. Once the contractor knows the funds are available, they can get to work.
Unlike home equity loans and lines of credit, lending partners to contractors typically do not require appraisals.
GreenSky can approve borrowers in seconds, Zalik says, and the money is available immediately, so there’s no waiting period between getting a quote and starting a project.
But once you’ve settled on an estimate, there’s little time left to compare — and comparisons are key, says Trent Porter, Certified Financial Planner with Priority Financial Partners.
“Just because what’s in front of you doesn’t mean it’s the best,” says Porter, who is based in Durango, Colorado.
Some home improvement lenders allow pre-qualified applicants to preview their potential loan amount and rate with a soft credit check, which does not affect their credit score.
Zalik says pre-qualified GreenSky offers are good for 60 days, so you can compare them with others.
pressure to spend more
As with other point-of-sale financing options, getting a loan offer when the contractor is in your home can leave you feeling pressured to start a project before you’re ready—or cost more than you initially planned. Are.
“I don’t like that it puts the client in a pressure position where they don’t have time to step back and weigh their options,” says Johnson.
Planning a project upfront will take some of that pressure off, says Tess Downing, a certified financial planner at Complete View Financial in San Antonio. She says to start with a firm budget and get bids from several contractors so you have costs in mind before shopping for financing.
If you’re considering a loan through a home improvement company, get two or three estimates that are convenient for you before pre-qualifying.
Other Payment Methods
Even if your contractor’s loan offer is enticing, compare other types of financing to find the best rates and terms.
Home equity loans and lines of credit are two financing options that often have single-digit interest rates and long repayment terms that keep monthly payments low. The interest on home equity financing may be tax-deductible if you use the money to make repairs or remodel.
Home equity line of credit, or HELOC, rates are variable, while home equity loan rates are fixed. Rates for both have been rising for about a year, so if you’re choosing between the two, Porter recommends locking in a fixed-rate home equity loan and refinancing later when rates come down.
Compare personal loans from direct-to-consumer lenders if you don’t have equity or prefer a collateral financing option. As is the case with loans available through contractors, you can usually pre-qualify for a personal loan online. This can also help you determine whether your contractor is giving you a good deal.
Best yet, go the interest-free route and pay cash. For repairs, consider tapping your emergency fund. A slow leak in your roof can lead to an emergency, says Porter, especially if it means costly repairs down the line.
This article was written by NerdWallet and originally published by The Associated Press.