Asking the right questions can uncover hidden costs
Everything costs more right now. Groceries, insurance, gas, a place to live. Even if you’re comfortable financially, you’re probably paying closer attention to cash flow, and where your money is tied up.
So when it’s time for new windows for the house, or you want a major change to your patio doors–and the price tag is daunting–financing can be very appealing. It keeps more money in your pocket, readily available if you need it.
But financing isn’t free. How you pay for the purchase can change the price tag, and it isn’t always disclosed up front.
Let’s take a look at what most businesses don’t tell you.
Ask DunRite: What’s the most important thing to know about window financing? Always ask specifically how the type of payment impacts your estimate. This helps you understand the real cost of your project. It’s also a good idea to clarify if any fees are added for using a credit card (such as a HELOC debit card).
Some companies automatically use financed pricing for their estimate, so if you don’t see a notation about a cash discount, it never hurts to ask.
Contractor Financing is Convenient, But May Carry a Higher Overall Cost
Many window and door companies offer financing through third-party lenders.
We do.
From a customer standpoint, it’s almost effortless because anyone can apply right during the sales appointment. If approved, that financing is rolled right into the contract within minutes.
It’s fast and simple.
Perhaps they qualified for a very attractive low rate, zero interest, deferred payments for twelve months or longer, or some other type of loan package that sounds great.
So what’s the issue?
It’s those darn per-transaction fees that are a percent of the sale.
These fees tend to be insignificant in a retail environment, but trust me, with a big purchase they become extremely important. Say the home improvement company is charged 5% per transaction. On a $40,000 project, that fee is $2,000.
For just one transaction.
This is a hypothetical example, of course, but you can imagine just how quickly the costs add up.
The important thing for you is not necessarily knowing the contractor’s exact dealer fee, since how it’s handled can vary from one business to another. It’s knowing whether paying cash changes what you pay.
Cash Will Almost Always Give You the Best Price
Financing any kind of home improvement isn’t like buying a car, where financing brings in dealer commissions, add-on sales like window tint and warranties, and manufacturer’s rebates that go right in their pocket. Car dealerships offer their lowest prices to financed buyers because they know they’ll make it up on the back end.
This industry isn’t like that at all. It’s actually the opposite.
In the home improvement industry, the seller often pays a hefty fee to the lender, just to be able to offer that financing to you.
It’s a marketing expense to encourage the sale.
When you consider the surcharges for every transaction, along with any other potential fees the seller might have to pay, like per-transaction fees or loan origination fees? Not only is the business not profiting by offering financing, it’s a VERY significant hit to their bottom line.
If it’s a business focused on low prices to win your business, they might not have room to absorb thousands of dollars in fees for every single transaction. Financing can mean they are suddenly losing money on the sale.
That’s why some businesses automatically write up their estimates with financing costs built in, then offer a cash discount.
They WANT you to pay by cash or check.
Both parties save money, and the transaction is a lot less complicated.
Ask DunRite: I paid my deposit in cash, but called in to put the final payment on a credit card. What’s with some companies charging a fee for payments taken over the phone? Many people don’t know credit card processing can cost more if a transaction is manually entered, instead of tapped or swiped. And that’s on top of any other fees… It applies to any keyed transaction, so it’s something to be aware of. When it’s a big payment, that cost might be passed along to the person paying the bill.
When They Don’t Mention a Cash Discount
Not every business offsets fees by offering a cash discount, however. They might blend financing fees into their pricing structure so every buyer pays them automatically, even if they pay cash, or they may write those fees off as a cost of doing business.
Unless you run a business and are familiar with Merchant Services, it’s something most people are unaware of.
They might be familiar with it for credit card purchases, but not for financing.
The details don’’t really matter, but you might want to know if financing will increase the amount you pay, and if cash lowers it.
If they don’t mention a cash discount, be sure to ask.
A loan is a purchase, too.
So before you start talking about monthly payments, 0% offers or how long you want to finance, it’s a good idea to first discuss your method of payment. Then you’ll know if paying by cash or check will save you money, and if any discounts, sales or other promotions depend on how you pay.
Those answers might help you decide, or even encourage you to look at other financing alternatives.
Before your brain starts thinking about interest rates.
What Does 0% Financing Really Cost?
0% financing can absolutely be attractive. If you can keep cash in the bank and spread a major purchase over time without paying interest, that deserves a look.
But 0% usually describes the rate you are paying, not whether the financing itself has a cost somewhere else in the transaction. The contractor may be paying a fee to make that offer available, the financed price may be different from the cash price or the promotion may come with very specific terms around timing and payoff.
So don’t stop at the 0%.
Ask how this offer compares to other financing options, and if it changes the overall estimate. Don’t only consider the cost of the loan, explore if it impacts the actual job estimate. Then be sure to dive into lender details, too, just to make sure you understand the fine print. How long does the promotional period last? What happens when it ends and can the loan be paid off early without penalty?
You might also ask what happens if you are late with a payment, or if your job has some sort of cost overrun after the financing is signed.
A lot can hide in the fine print of that very attractive offer. Depending on the loan terms, a late payment can trigger an unexpected interest rate increase and penalties to apply.
“No Payments for 12 Months” Can Accrue Interest
This is another offer that can sound fantastic, especially if you want the project done now but would rather delay the impact on your monthly cash flow.
But no payments does not always mean no interest. Interest may continue to accrue during that period, the loan may convert to a different rate later or the promotional terms may have conditions that become important once the no-payment period ends, or if you miss a payment.
The key question is simple: what happens to the balance during that promotional period?
If it is growing while you are not making payments, you need to know that up front. You also want to know what the rate and payment will look like once the promotional period ends.
What if you miss a payment, or want to pay it off early?
A Low Monthly Payment Can Be Very Expensive
Monthly payment is probably the easiest number in financing to sell because it feels manageable. And sometimes that is exactly what you need.
But it’s important to know that payment is lowered because the loan is stretched over more years of payments. That may help with cash flow, but it can also mean paying considerably more interest over time.
A lot more.
So look at the monthly payment, but also look at the APR, loan term, fees and total amount you will repay. A higher monthly payment on a shorter loan may cost significantly less than a lower payment over a longer period.
The point is not that one is right and the other is wrong. It’s knowing what each option actually costs, so you can make an informed decision.
Your Installer’s Financing is Only One Option
Most window and door companies offer their own financing, which is handled right during the purchase transaction. It’s very convenient, but not always the best choice. If you have time to explore other options, that can save quite a bit of money.
Your bank or credit union may offer personal loans with a lower interest rate, perhaps with a cash incentive to switch.
The contractor’s financing may come out ahead, but without another option to compare it against, you really don’t know.
Don’t Forget About HELOCs and Home Equity Loans
For homeowners with enough equity, a home equity loan or line of credit can be another way to fund a large project.
A home equity loan usually gives you a lump sum to cover the purchase, while a HELOC gives you access to a line of credit you can draw from as needed. Depending on rates and terms, either one may be attractive.
If the HELOC is accessed using a credit or debit card, be sure to consider those fees, too.
There can also be closing costs, lender fees or variable rates, and of course, the debt is tied to your home. Using the house as collateral might drastically reduce your interest rate, but it also increases risk compared to personal debt financing options.
If you lose your job and stop paying, you could lose your home.
This doesn’t make home equity financing a bad option. It just means you need to compare the full cost and risks against contractor financing and other loans.
A personal loan may be less risky, but the lack of collateral usually drives up the interest rate.
Your First Financing Choice Doesn’t Have to Be Your Last
Sometimes it makes sense to use one form of financing now, then move the balance later.
Maybe a HELOC has a strong introductory rate. Maybe contractor financing gets the project moving quickly, or has a promotional offer that ends in six months. Maybe rates change down the road and refinancing your mortgage becomes more attractive.
These options can be smart, but only if the math works. Before you assume you’ll refinance later, check for prepayment penalties, origination fees, closing costs, balance-transfer fees and how long the new loan will run. Understand what might happen if life changes your plans.
A lower interest rate sounds great, but if you spend thousands moving the debt or stretch it out for many more years, any savings can disappear pretty quickly.
Most Credit Cards Are Financing Too
For smaller projects, a credit card may be the simplest answer. Three or four windows, a front door or another smaller purchase may not be worth setting up a dedicated home improvement loan.
But there is a big difference between using a card as a payment method and using it as long-term financing.
If you plan to pay it off quickly, it may work perfectly well. If the balance is going to sit there for years, though, the interest rate becomes much more important and can make the purchase considerably more expensive.
Here’s What Most Homeowners Never See About Credit Cards
Businesses pay to accept them.
That is not especially interesting when you are buying lunch. It gets much more interesting on a $50,000 or $100,000 home improvement project.
Here’s why.
Like some financing fees, credit-card processing costs are often calculated as a percentage of the purchase price.
At 3%, a $50,000 transaction could incur a Merchant Service fee of $1,500 to process that credit card transaction. At 6%, that fee becomes $3,000.
And if the purchase price is $100,000, that company could be looking at a $6,000 fee.
Sounds like a credit card, right?
That might not be the only cost, either. Many businesses also pay monthly account fees, per-transaction charges or other processing-related costs just to accept credit cards. Add all of that up across hundreds or thousands of sales each year, and it becomes a substantial expense for the business.
Not every card costs a merchant the same amount to process. Premium travel cards like American Express and Discover, rewards cards and a few other types of cards typically carry much higher fee structures for the business.
Those miles, points or cash back you receive? The business pays for that, too. It’s not free.
There is nothing wrong with using the card that makes the most sense for you. But it’s helpful to understand why some businesses treat large credit card purchases differently. If their prices are already low, there just isn’t a lot of wiggle room.
Ask DunRite: Can businesses charge extra if I use a credit card? This is becoming more common, but it’s a bit complicated. There are rules that apply. For example, Visa and Mastercard prohibit companies from adding a surcharge on debit card transactions, even if it’s processed as credit.
The same rule applies to their pre-paid cards.
Other card networks might have different rules and fee limitations, which can vary based on a specific credit card. And of course, all surcharges are subject to disclosure requirements, and applicable state and federal laws.
Shop for Financing Like You Shop for Windows
Most homeowners understand the value of getting more than one window or door quote. Do the same thing with the financing, especially if it’s a purchase of more than $10,000-$15,000.
The larger the purchase, the more money you can potentially save.
This is true for large door projects, too, when oversized patio doors and moving glass wall systems can run into six figure purchases.
Consider comparing the contractor’s financing with at least one outside option, such as your bank, credit union, home equity loan, HELOC or another lender. Then look beyond the advertised rate and compare the actual project price, financing fees, APR, loan term, promotional conditions and total amount you will repay.
A great financing offer attached to a higher-priced project may not be the best deal. And the contractor with the best window or door price may not offer the best financing.
Treat them as two separate decisions: first, which project offers the best value? Then, what is the smartest way to pay for it?
Ask DunRite: Does a visible fee mean a contractor is more expensive? Not necessarily. A visible fee can seem more expensive because it’s called out, while the same cost built into an estimate can feel free. A company that separates out payment costs may actually have a lower starting price than one that builds them into every estimate. You won’t know until you compare.
The Cheapest Financing Isn’t Always the Best Financing
Sometimes paying a little more to finance is completely worth it.
Perhaps you want to keep more cash on hand, and that’s more important than finding the lowest cost of financing. Maybe a HELOC sounds good because of the flexibility, or you like the sound of a short loan, even though the monthly payment is higher.
It’s a personal decision.
The important thing is knowing what that flexibility costs, so you can decide whether it is worth it. An informed consumer is a confident one.
Ask DunRite: Before You Sign, Ask One More Question. If you remember nothing else, remember this: ask what the project costs as a cash buyer, then ask what changes if you finance it. Whether you then choose to shop your financing or not, you’ll have a solid understanding of how the financing impacts your purchase.
Need Help Comparing Your Options?
DunRite Windows & Doors serves homeowners throughout the Phoenix metro area, including Phoenix, Scottsdale, Paradise Valley, Fountain Hills, Cave Creek, Tempe, Mesa, Chandler and Gilbert.
If you’re comparing options, we’re happy to give you a straightforward quote, explain how different payment methods affect the price,and help you understand exactly what you’re buying before you decide.
