How to find the right financing for home contractors

Using a general contractor who offers home improvement financing seems convenient, especially if they’re standing in your kitchen ready to start as soon as you pay them.

Contractors who offer loans usually work with third parties that specialize in home improvement financing. While there are benefits to the arrangement, even a highly recommended contractor may not give you financing that fits your needs, so it pays to shop around.

Here’s what to know about contractor financing options and alternatives to consider.

RATES ARE TIED TO CREDIT, NOT EQUITY

Many contractors offer unsecured personal loans, which don’t 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 the rate you receive. The lowest rates go to borrowers with good credit.

No collateral means a lender can’t take your property if you fail to repay, but it also means the interest rate could be high, Atlanta-area certified financial planner Jovan Johnson says.

Contractors may subsidize the 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 provide loans through contractors.

And some loans have zero-interest introductory periods for borrowers with strong credit, which Johnson says may be ideal if you’re confident you can pay off the balance during the promotional period.

LOANS ARE FUNDED FAST

A loan through your contractor may also mean a faster start to your project. Once the contractor knows money is available, they can get to work.

Unlike with home equity loans and lines of credit, contractors’ lending partners don’t usually require an appraisal.

GreenSky can approve borrowers in seconds, and funds are available instantly, so there’s no waiting period between getting a quote and starting the project, Zalik says.

But getting a loan offer when you’ve just settled on an estimate leaves little time to compare — and comparing is key, says Trent Porter, a certified financial planner with Priority Financial Partners.

“Just because that’s what’s in front of you doesn’t mean it’s necessarily the best,” says Porter, who is based in Durango, Colo.

Some home improvement lenders allow applicants to pre-qualify to preview their potential loan amount and rate with a soft credit check, which doesn’t affect their credit score.

Zalik says pre-qualified GreenSky offers are good for 60 days, so you can compare them with others.

PRESSURE TO OVERSPEND

As with other point-of-sale financing options, getting a loan offer while the contractor is in your home could make you feel pressured to start a project before you’re ready — or spend more than you initially planned.

“I don’t like that it puts the client in a pressure situation where they don’t have time to kind of step back and weigh their options,” Johnson says.

Planning the project upfront will take some of that pressure off, says Tess Downing, a certified financial planner at Complete View Financial in San Antonio. Start with a firm budget and get bids from multiple contractors so you have a cost in mind before you shop for financing, she says.

If you’re considering a loan through a home improvement company, get two or three estimates you’re comfortable with before pre-qualifying.

OTHER WAYS TO PAY

Even if your contractor’s loan offer is enticing, compare other types of financing to find the best rate and terms.

Home equity loans and lines of credit are two financing alternatives that often have single-digit interest rates and long repayment terms that keep monthly payments low. The interest on home equity financing can be tax-deductible if you use the money for a repair 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 now and refinancing later if rates decrease.

If you don’t have equity or prefer a no-collateral financing option, compare personal loans from direct-to-consumer lenders. As with loans available through contractors, you can usually pre-qualify for a personal loan online. This can also help you gauge whether your contractor is giving you a good deal.

Best yet, go the interest-free route and pay with cash. For repairs, consider tapping your emergency fund. A slow leak in your roof might constitute an emergency, Porter says, especially if it means costly repairs down the line.