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Tips When Considering Financing For Your Home Improvement Project

Remodeling projects today are bigger and more expensive than ever before.  Most consumers are now using some type of financing to help fund their remodeling dreams and make them a reality.  Also, the availability of financing has led to larger, more extensive projects.

When considering financing, you should know that there are several different types available.  There are secured and unsecured loans.  Fixed Rate APR or Variable Rate APR, Zero Interest, Deferred Interest, Same as Cash or Installment Loans.  All are different and have different terms and conditions, so make sure you choose the program that is right for you and your situation.

Secured vs. Unsecured Financing

A secured loan basically just means that there is a secured interest (collateral) on the loan.  Usually this interest is secured in the form of a lien on your home.  Secured loans will generally have a lower interest rate than an unsecured loan (since there is a greater risk of default on a loan with no secured interest).  A home equity loan or line of credit is an example of a secured loan, since your home is being used as the secured interest.  These types of loans generally have interest rates between 2.99 and 9.99%.  You must have equity in the property in order to use this type of financing (however, since it is basically a second mortgage, any interest you pay on these types of loans are tax-deductible, just like the interest on your mortgage).  These loans are usually set up as installment loans, meaning they are repaid as a regular monthly installment payment.

Unsecured loans are loans that are NOT secured by any type of interest or collateral, so naturally they will have higher interest rates.  Credit cards are examples of unsecured credit, because there is really nothing they can take if you don’t make your payments.  Even an auto loan is a secured loan, because if you don’t make your payments, they can take the car.  Interest rates on unsecured financing can vary anywhere from about 8.99% to 27.99%.  When comparing interest rates on different types of financing, be sure to compare apples to apples.  You shouldn’t compare rates of unsecured loans to those of secured loans, as they are completely different animals!

Fixed Rates, Deferred Interest and Same as Cash

Whether you choose secured or unsecured financing you should always look for a loan with a fixed rate, meaning the APR will not change during the life of the loan.

Deferred interest loans are very prevalent in the remodeling industry today.  These are usually unsecured loans with a higher interest rate, however the interest is deferred for a period of time, 12 months for example.  During this deferred interest period (sometimes referred to as the Promotional Period), the customer can pay the balance of their loan without interest, as long as it is paid in full within the promotional period.  However, be careful, with a deferred interest loan interest is still accruing during the promotional period.  It is deferred to the end of the promotional period, so if the entire balance is not paid by the end of the promotional period, all of the accrued interest from the entire 12 month period is then added to the balance.  This interest rate is usually ridiculously high, over 20% in most cases.  This is a great type of loan for someone who is usually (or plans to be) a cash buyer, but is just waiting on a bonus, tax refund, or maybe waiting for a CD to mature.  This type of loan will allow you to get the work done now, with no upfront cost, and then pay for it several months later without paying any more than if you paid cash that day up front.  However, do not use a deferred interest loan if you are not sure if you will have it paid off within the promotional period.

Same as Cash programs are very similar to deferred interest, only that the interest does not start to accrue until after the promotional period.  However, be careful, some contractors are using deferred interest programs but calling them Same as Cash!  So make sure you know what the terms of your financing are before you sign anything.

Installment Loans

Installment loans are geared towards customers who would like to make a monthly payment.  This can either be secured or unsecured, and are usually for a set number of monthly payments (such as 48 months, 60 months, etc). However, some types of unsecured financing are not for a fixed number of months, like a credit card.  Your monthly installment payment is based on a percentage of your unpaid balance.  Check to make sure there is no pre-payment penalty when using an installment program.  This means that you can pay the loan off early and only pay interest on the time you actually used the loan.  Some remodelers are offering zero interest installment loans also.  These types of loans are very attractive to the consumer for obvious reasons.  However, the contractor is paying a fee to offer these programs to their customers, so that fee is usually built in to the sale price of the project.  Therefore you should always ask if there is a better deal if you didn’t utilize  any financing options.  The price you pay cash may be significantly lower than the price you pay when you are using financing.