Homeowner Trust 101: Financing Options For Customers

Editor’s Note: One way you can gain homeowner trust is by helping your customer navigate the tricky world of financing for their project. Today, we have guest author Andy Misek of Finance Guru sharing information on financing options for customers. This guide will hopefully help you answer any questions that come your way about financing!

Many times, people can’t outright pay for home improvement projects with cash. Large scale projects such as getting a new roof, replacement windows, and a kitchen remodel can cost thousands and thousands of dollars. However, these improvements need to be done so many homeowners turn to finance.

These financing options allow homeowners to start on their home improvement project now and pay for it over time. While there’s interest associated with this payment option, they pay for the loan quicker so interest isn’t an issue. Below, you’ll see the different financing options available to homeowners to help pay for home improvements.

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Credit Card & Location Financing

One of the easiest ways to pay for a home improvement project is using a credit card, more specifically a store/location specific financing (you don’t get a credit card, but it works the same way). You’ll see many home improvement companies offer different financing options. This is an easy way to pay for a home improvement project without worrying about taking out a loan from the bank or not being able to afford it.

If a company doesn’t have a financing offer, they can always turn to a typical credit card. The benefit of going this route is that homeowners may be able to earn points with the purchase. These points can be used for future purchases to get something cheaper, or even free.

No Interest For A Certain Period Of Time

Sometimes, companies offer great financing that shouldn’t be turned down. If customers spend a certain amount of money, they offer no interest for a certain amount of time (usually 1 year or until the end of the current year). This means that all money goes directly toward the principal until the end of that year or period. If they pay off the loan before that period ends, they won’t have to pay any interest on the loan. So, they’ll be able to get a home improvement project done and pay overtime without the fear of adding interest.

Be Careful When Using A Credit Card

The one major problem to a credit card is that it can accrue interest rather quickly. In fact, most credit cards have an 18% to 25% interest rate. Therefore no interest for a certain period of time is important. If credit card debt isn’t paid off quickly, the customer will end up paying a lot more than the home improvement project is worth.

Navigating Loans

Many people turn to loans when it comes to paying for a home improvement project. Your customer can go to the bank and get a loan; however, credit scores will determine what they qualify for. There are many things to consider when getting a loan to pay for the home improvement project. Below, you’ll be able to learn more about your options, the benefits and the drawbacks of getting a loan to pay for a home improvement project.

Secured Vs. Unsecured

Let’s start by discussing the difference between secure and unsecured loans. Without knowing too much about loan structures, homeowners may think that a secured loan is the better option, however, that’s not true. Secured loans are more worried about the security of the lender. To get a secured loan, they’ll need to offer some sort of collateral to ensure that they’ll make the payments. If payments are not met to the liking of the lender, the item that was put up for collateral can be used as payment. These loans are often offered to people with poor or no credit.

On the other hand, unsecured loans don’t require any collateral. Think of this like a credit card payment or mortgage where you don’t have to give anything up as collateral. Homeowners typically need to have a better credit score to qualify for an unsecured loan because they can be trusted to make your payments each month.

What’s The Interest On A Loan?

The first thing to look at when getting a loan is the interest. This will determine how much the home improvement project will ultimately cost. As the customer pays, over time, there’s an interest rate that determines how much more will be added to the principal for the loan lasting another month. Depending on the credit score, the interest rate may be lower. The lower it is, the less money that will be added each month.

There are also two different types of insurance – compound insurance rates and simple insurance rates. Let’s start by discussing simple insurance rates. Simple interest is calculated by multiplying the principal by 1 + interest rate. This means that the interest is only based on the principal amount. Compound interest, on the other hand, is based on principal, interest rate and the number of years a homeowner must pay. The homeowner will end up paying more interest over time with a compound interest rate loan.

The Length Of A Loan

The length of a loan also makes a huge difference in how it’s paid. The longer the length of the loan, the smaller the payment that needs to be made each month. However, homeowners will end up paying more interest over time, especially with a compound interest rate loan. If they opt to have a short loan length, they’ll have higher payments each month and they’ll end up paying less over time.

Ultimately, it’s up to the homeowner to decide what’s best for their situation. Can they make higher payments each month? Then a short length is a better option for them. If they need more time/can’t make the higher payments and don’t mind paying more money over time in interest? Then a long-term loan is the better option for the homeowner.

There are many options for the length of the loan. Usually, the more money the loan is, the longer timeframe homeowners have. There are 30-years, 20-years, 15-years, 10-years, 5-years and even shorter-term loans available. These time frames are to give the loan structure and helps determine the payment amount (with interest) each month to be complete by that time.

Types of Loans

Now that you know the basics of loans, it’s time to look at types of loans homeowners can investigate. Below, you’ll see several options that could be good options for homeowners.

Personal Loan

Personal loans are offered by banks and are loans for a larger purchase excluding homes and cars. That’s why it’s the perfect option for home improvement projects.

Line of Credit

A line of credit is a little different than a traditional loan. When homeowners are accepted for a line of credit, the customer has a pool of money that can be pulled from at any point. They have an idea of what is affordable and what the interest rate will be before they get started with a home improvement project.

Co-Sign Loan

Sometimes, homeowners don’t have the credit score to get a loan worth enough money or at a low enough interest rate for a home improvement project. That’s where a co-signer comes in which is security for the bank that they’re going to get their money.

When a homeowner and a cosigner are approved for the loan, both names are on it. If for any reason the loan can’t be paid, the co-signer is liable for the payment. Keep in mind, when getting a co-sign loan, it’s very difficult for the co-signer to leave the agreement at any time.

The cosigner’s credit is also taken into consideration when determining if the customer will be accepted for this loan. If they also have a poor credit score, a customer can’t expect to be accepted either. Customers should make sure that your co-signer has a good credit score before getting to start with the loan processes because anytime a credit score is checked, the credit is then lowered.

Debt Consolidation Loan

While customers can’t do a debt consolidation loan at first, it’s worth noting what it can do. Let’s say a customer has several loans out, including a personal loan for their home improvement project, a debt consolidation loan can make it easier to pay off their bills.

This type of loans consolidates loans into one payment. Customers can use the debt consolidation loan to pay off all their loans, so the payment is one slightly larger payment that’s only taken out of their account once per month. While we don’t recommend using a debt consolidation loan, it’s a great way to get out of a tough situation.

If a homeowner has an emergency or needs options for a project, you can help them by filling them in with the valuable financing options available.  Depending on the length of the loan and your credit score, there are plenty of options available.