Contractor financing: what the offer really costs

The equipment quote has one large number. The loan offer has a much smaller one, followed by “per month.” Suddenly the paperwork feels a little friendlier.

That monthly bill matters. It has to fit with everything else your household pays for. But how many payments will you make, and what do they add up to? What has to happen for a special offer to stay special?

Here’s how to read a heating and cooling payment offer from your contractor. We’ll use a made-up example of “120 months at 9.99%” to show the math. We are not offering that rate or judging a loan you’ve been quoted.

First, work out who you’re borrowing from

The company doing the work may not be the one lending the money. Your lender supplies the money or credit you borrow. Find its name on the agreement, then find out what type of account you will open.

An installment loan gives you a set amount to repay in regular payments over an agreed time. A credit-card account has a borrowing limit and may let you buy more things later. It does not work like a one-time loan for this job. Contractors can arrange different types of credit, so the name of the offer does not settle which one you have.

The paperwork should explain how the job gets paid and when your payments start. If an offer says “subject to approval,” the lender has not yet agreed to give you those terms. Get the terms and dates settled before you build the work plan around them.

Keep the price of the job in view

Put the written price for the equipment and work beside the borrowing offer. Compare the same job each time. The quote may call this the scope of work: what the installer has agreed to supply and do.

A useful question is: “What would this exact job cost if I didn’t use this payment plan?” The price might stay the same. It might change, or the offer might include different work. Now you have prices to compare, without assuming every deal hides an extra charge.

Keep any deposit and charges paid on their own in the picture, too. They still count, even if they aren’t in the monthly bill. If the work in the quotes differs, our guide to comparing heating and cooling quotes helps you line them up first.

An upgrade or a service plan may be useful. It still needs its own price and purpose in the work quote. A loan form doesn’t need to become a shopping cart in disguise.

Give the monthly payment its full calendar

The loan term is the time you have to repay. A term of 120 months means ten years of planned payments; 60 months means five. Write the years beside the months to see how long the debt will last.

Next comes interest, the lender’s charge for letting you borrow. The interest rate shows that charge as a percentage. A fixed rate stays the same over the agreed loan term. A variable rate can change under the agreement’s rules.

For a loan with a set amount and term, annual percentage rate (APR) shows interest and certain fees as a yearly percentage. It helps you compare offers, but it may not include every charge. Read the fee list, too. An origination fee is a charge to set up the loan. The way it is charged can change how much money you get or repay.

A $10,000 example: five years or ten?

Suppose you borrow $10,000 at a fixed yearly interest rate of 9.99%. There are no fees, and the monthly payments are equal. That $10,000 is the principal, the amount you borrow before interest is added. With no fees, the APR here is also 9.99%.

This is a made-up loan to show the math. It is not an estimate of what your heating or cooling job should cost. Both examples work out interest monthly, with payments at the end of each month. Neither has a deposit, late payments or extra payments.

• Over five years: about $212.42 a month for 60 months. You would repay about $12,745 in all, including about $2,745 in interest.
• Over ten years: about $132.10 a month for 120 months. You would repay about $15,851 in all, including about $5,851 in interest.

Monthly payments are rounded to cents. Totals use the amounts before rounding and are shown to the nearest dollar. These examples are not a lender’s payment schedule.

The ten-year loan leaves about $80 more in the monthly budget in this example. It also adds about $3,106 in interest over the full term. That is the trade-off behind the smaller payment.

A shorter term may not fit your budget. A longer one is not always the wrong choice. Weigh both questions: can you manage the payments, and what will they cost in all? Real offers may have different rates and fees, so changing only the term won’t always give this result.

Find out what a special interest offer promises

Special offers can sound alike while giving the last payment a very different job.

With a true introductory 0% interest offer on a purchase, interest does not build up during the stated period. If a balance, or money still owed, is left when it ends, interest can begin under the later terms. Other rules still matter, such as making required payments on time.

Deferred interest is interest you may not have to pay if you meet the offer’s rules. If you miss the deadline to pay off the required purchase balance, you may owe interest from the offer period. Paying nearly all of it is not the same as paying it in full.

Read phrases such as “no interest if paid in full” with care. That little “if” has been given a large job. Find the written payoff rule, the exact end date and the rate if you don’t meet the rule. A salesperson’s short version may leave those details out.

The minimum payment and the payoff plan can be different

The minimum payment is the least you must pay for that billing period. Paying it may still leave money owed when the offer ends. Some deferred-interest loans have different payment rules from a credit card during the offer. Use your agreement, rather than a rule you recall from another account.

For example, paying off a $6,000 purchase in 12 equal payments would take $500 each time. That assumes no other charges or purchases. If the bill’s minimum is lower, paying only that amount would leave some of the debt unpaid. The real payoff deadline may also fall before your usual monthly due date. Check the dates as well as the math.

If you bought other things on the account, find out which debt each payment reduces. This is payment allocation: how the lender splits payments among the amounts you owe. Don’t assume every extra dollar goes to the purchase with the special offer. Get instructions for your account and check your progress on the statements.

Plan to make the last payment before the offer ends. Allow for the time the lender needs to process it. Write down the amount, date and how you will check that it went through. That’s more useful than a reminder that says “deal with loan.”

Read the parts that could change the plan

Paying early can sound simple until the agreement adds a rule. A prepayment penalty is a charge for paying a debt off early. The written terms should say whether one applies. Get the steps for extra payments and the full amount needed to pay off the debt on your chosen date.

Find out whether property backs the debt. This property is called collateral, and borrowing that uses it is called secured. If you fail to repay, the lender can take that property. If you use your home, it can be at risk. The name of the contractor’s payment plan does not tell you whether property backs it.

Before signing, collect the answers in one place:

• The exact work and equipment price, plus any deposit or charges paid on their own.
• The lender, account type, amount borrowed, interest rate, APR and fees.
• The payment amounts, due dates, time to repay and full amount you will pay.
• The end date of any special offer, its full-payoff rule and what happens if you miss it.
• The rules for extra, early or late payments, and any property backing the debt.
• When the money will be ready, how the installer is paid and whom to call about the account.

If the written offer and what you’ve been told don’t match, clear that up with the lender and contractor before you agree. Keep the final agreement and payment details together. No one enjoys piecing together a loan plan from three emails and half a phone call.

Put the offer beside another you can get

Another offer helps you judge these numbers. Compare the same job and borrowing amount. Look at fees, payment dates, term, full cost and any property that backs the debt. A rate in an ad is only a starting point. You need to know what terms that lender will offer you.

Our heating and cooling financing guide explains other ways to pay and where to look for help. The heating and cooling hub brings the project guides together.

Now the monthly payment has its full cast: a clear job, an agreement, a schedule and a set of rules. You have the details you need to talk through the offer and spot what is still missing.