Is Home Improvement Financing Still a Viable Option in This Volatile Economy?
Inflation is still too high for many Americans’ taste. Despite a decline over the past two years, 2023’s inflation rate of 6.0% remains three times higher than the 1.4% reported in 2020. The US Federal Reserve countered inflation by raising interest rates to discourage excessive borrowing. Unfortunately, higher interest rates also mean that borrowers will pay more when buying on installment. Consequently, many items that require home financing will become even more expensive. Eventually, more Americans will find it harder to afford home purchases or even home improvement projects.
There are three ways to buy a home: spot cash, deferred payment or long-term home financing. Most home-buyers can only afford to buy homes if they use home financing. With today’s high interest rates, many households can only afford to upgrade their existing homes rather than buy a new one. However, the price of building materials, equipment and labor can add up to a tidy sum.
Many homeowners could surely use some assistance in financing projects such as installing a new HVAC, replacing the roof or renovating the kitchen. Home improvement suppliers offering home improvement financing can help families by offering easier payment terms.
Home improvement remains on the rise as the housing market continues to price itself out of reach for most Americans. One of the major factors for the increased interest in renovations is that fixer-uppers are becoming popular with millennial buyers. Instead of plunking down money for brand-new homes, many are saving on costs by buying older houses that need repairs. A 2021 Bank of America survey reported that 82% out of 1,100 millennials said they’re more likely to buy a fixer-upper than a brand-new house.
These old houses usually cost less than $100,000 and are found in smaller, rural locations. The availability of remote jobs removes any preference for locations for many millennial workers. As a result, many are snapping up these houses at bargain prices. However, most of these homes will require some repair work.
For many new owners, home improvement costs can reach staggering levels. The same BofA survey reported that the number of homeowners who took out loans for home improvements rose from 34% in 2017 to 42%. Companies in the business of selling building materials and home improvement items who have yet to offer home financing should see this as an opportunity.
What is Home Improvement Financing?
Financing on home improvement projects allows households to take out loans to pay for the cost of repairing or renovating their homes. The process works similarly to cars, furniture or equipment bought on layaway. First, the issuing company checks out the borrower’s credit score and income sources to ensure they’re in good standing and have the means to repay.
Borrowers must also submit the plans and cost estimate for the home improvement project. The amount applied for the loan must correspond to the cost estimates. In addition, borrowers will also need to include the contractor’s name to provide credibility to the project.
6 Benefits of Offering Home Improvement Financing Options to Customers
As a contractor or building material supplier, insisting on cash or straight payments doesn’t make good business sense. After all, many home improvement projects start small but then run into complications. A simple act of replacing tiles can inadvertently hit a mainline pipe and cause flooding. Providing customers with an easier way to pay can encourage them to push through with their decision to renovate. Both parties stand to benefit from having this option available.
Homeowners avail of home loans and mortgage payments for the same reason. Even if they have enough money to pay for the purchase of a new house, it doesn’t make sense to put all their money into one purchase. They need funds for other everyday expenses like groceries, utilities, tuition and family activities.
The same goes for customers who want to implement home improvement projects. Most of the time, they can’t commit their entire budget to a home improvement project considering they have other bills to pay. Fixed monthly payments are a great way to settle their obligations without breaking the bank.
Benefits for Businesses
1. Increased Sales and Revenue
Instead of buying equivalent to what cash they have on hand, customers can proceed with full-scale renovations knowing that they can spread the payments out through equal monthly installments. When more people hear about your flexible payment options, you’ll not only have more customers but experience bigger purchases as well.
Conversely, the lack of home improvement financing options can limit a customer’s options when buying building materials and supplies. In many cases, this can force them to abandon the idea halfway through shopping and just delay the project.
2. Improved Cash Flow and Reduced Financial Risk
When you partner with a financial institution or a lending agency, they’ll pay for the customer’s purchases up front. Instead of you having to open a tab for your customer, the lending agency will handle collections. Home improvement financing options effectively free up your cash flow and improve your ability to restock items and expand your inventory.
3. Competitive Advantage
Compared to stores that only accept cash or credit card payments, you can accommodate more customers as well as supply materials for bigger projects. More customers means more orders, which means suppliers will now start noticing you more. The increased retail activity generated by your business will surely place you at an advantage over your competitors. This is especially true for those who insist on straight transactions only.
Benefits for Customers
1. More Affordable Payment Options
This first benefit is often reason enough for most customers. The success of their home improvement efforts depends on whether they can pull off the work according to specifications. If costs suddenly get in the way, any hope of completion can disappear.
Customers provided with home financing options can breathe easier with flexible terms or affordable monthly payments. Installment financing also ensures that customers won’t have to worry about meeting their other obligations when embarking on renovations.
2. Ability to Make Big Purchases
Sometimes, plans can go sideways or run into complications. When a project requires additional materials, customers with fixed budgets won’t be able to afford them. Home financing options such as layaway or installment payments can help alleviate the problem without causing any delays. In addition, customers are more likely to pull the trigger on a purchase when they see smaller monthly payments instead of a big lump sum.
3. Increased Purchasing Power
Customers should rightfully buy only items that they can afford. When they see the upfront costs, they might balk at the large amount and call off the project. However, breaking the cost into smaller, more affordable installment payments allows your customer to determine how much they can afford every month. This makes it easier to budget for projects in a way they can afford.
Which Home Improvement Financing Option Should You Offer?
Homeowners have multiple options when seeking financing for home improvement projects. They can apply for personal, unsecured loans from their bank which they pay in fixed monthly installments, including interest. Home equity loans can involve a larger amount, with the borrower’s house as collateral. These also involve fixed interest rates and monthly payments. Meanwhile, the Home Equity Line of Credit (HELOC) is similar to home equity loans and also features revolving credit lines. FHA Title 1 loans guaranteed by the Federal Housing Administration (FHA) are also available for homeowners who need financing for their home improvement projects. Since this is a government-funded program, it does not require any equity.
When it comes to businesses, which financing options should you consider offering to your customers? Cash and credit card payments are standard and should always be available options. Other financing methods that you should consider include various direct-to-merchant and direct-to-consumer options.
Direct-to-merchant financing involves fronting payments owed by customers to the seller. Brick-and-mortar shops and online storefronts that accept card payments are often eligible for this type of lending program from financial institutions. A typical direct-to-merchant system provides a business with a loan amount. It then sets up a collection system where a percentage of all debit and credit card sales goes to the merchant to pay for the loan.
Direct-to-merchant loans are an easy way to gain access to capital. The automated payment process via the card payment system is also a convenient way to pay for loans. They’re also highly flexible, which is beneficial for small businesses. It tracks the money flowing daily into the business and simply collects a percentage. When sales are slow on any given day, the collected amount also goes down.
However, there are also drawbacks to the direct-to-merchant system. The ease of application and approval for this type of business loan is mostly because of its prohibitive interest rates. At the same time, direct-to-merchant requirements are much stricter when evaluating customers. They also impose lower loan limits and require better credit scores.
For merchants, the automated deductions from your card payments can also turn into a vicious cycle when left unchecked. If your business relies more on alternative forms of payment like cash or cardless payments, you might experience a more difficult time paying off your DTM loans. Even so, lenders will usually demand payment when your payment system can’t generate enough to pay for the daily amount.
Direct-to-consumer financing is more popularly known as Buy Now, Pay Later (BNPL) plans. BNPL allows customers to just pay a fraction of their outstanding balance due every month in exchange for a nominal service charge plus interest. For customers who have yet to apply for a debit or credit card or lost their privileges a while back, BNPL options from online lenders can be a convenient way to make home improvement purchases.
A typical BNPL transaction starts when a customer avails a Buy Now, Pay Later option during checkout. After filling out an application form complete with contact details, the borrower will undergo evaluation and risk assessment by the lender’s system. If the application gets approved, the customer gets approval to claim the order while the merchant receives the full amount. The customer will then pay off the purchase to the lender in set monthly installments.
By getting the payments up front even for installment purchases via BNPL, a company’s cash flow will remain liquid, allowing it to quickly replenish inventory and add more items for sale. In addition, the risk of funding loans to consumers falls squarely on lenders instead of the sellers. While the requirements are less stringent and credit limits are higher compared to direct-to-merchant loans, payment periods are usually shorter.
Like every other financial transaction, there are risks involved in home improvement financing. A debt by any other name remains a debt. The inability of a borrower to pay even the minimum amount might be negligible for many lenders. However, if you get enough borrowers to default on payments, the business could collapse in an instant. This is also the reason why you need to make sure to keep your credit tools such as risk assessment software and customer credit score databases continuously updated.
One of the effects of offering loans for home improvements is the added complexity of your accounting systems. By taking on home financing, your accounts receivable and accounts payable systems will have to make accommodations for reductions in cash flow and delays in accounts receivables. Deferred payments can affect the status and amount of your available cash, so you’ll need to make adjustments to ensure timely payments to staff, suppliers and creditors.
With Ingage, Home Financing Options Are Always Part of the Presentation
Ensuring that home financing options are part of your client-facing presentations can help your customers make informed decisions about home improvement projects. Your presentations can get clients excited to get to work on their homes, and with Ingage they can also provide assurance they can afford that work.
Ingage is a cloud-based interactive presentation software that includes pre-built financing pages that can form part of your killer presentation. Adding this interactive section to your presentations can help clients get all the details they need. So instead of going back and forth, Ingage can easily provide home financing information so that your clients see the full picture and can commit to that home improvement project.
Drop us a line over at Ingage. We’d be happy to know more about your specific requirements, and we’ll even arrange for a free demonstration to show you how interactivity can grab your clients’ attention and increase their engagement.