What is the “REAL” cost of financing?

People OFTEN ask, what's the deal with zero percent financing? Unfortunately, what I’m about to tell you – you may not like.  

For starters, there are some hidden fees in there so let me tell you the truth about zero percent financing when the window company or a siding company or roofing company  

I want you to know kind of how the whole system works because as a neighbor and fellow long islander, you deserve to know the trust.  

So, a typical window company will need to make money to stay in business – and that makes sense, right. Now there is typically a fine line between making money, breaking even and losing money. Most successful business owners have a great pulse on what those numbers are. For the sake of this explanation, let’s use 20% Gross Profit Margin as our breakeven number. Now based on how we accept payment, that number could change – HOW? Well let’s start with Credit Cards. We all see that of recent when we go shopping we are asked “Cash or Card”? If we choose a card, we don’t get the “cash discount”. Why? Because the CC Processor is charging the business a fee of 3-4% to process the charge, that 3-4% HITS the business’ bottom line and therefore affects profits. The difference here is that this “FEE” while none of us like it, is rather transparent. We know what it is and because of that there is a level of genuineness involved.  

So when a home improvement company offers your financing through a financing vendor, there is a COST to the home improvement company to that financing. That cost could vary however as of right now, that cost is between 7-14%+. That means that the company “selling” you the financing is going to pay a “FEE” of 7-14% on the SALE PRICE of the project. The cost is completely independent of the FEES you pay through the lending. Now here is how many of these companies operate. They will charge the SAME AMOUNT regardless of if you pay cash/check, CC or Financing. This way the lid isn’t blown off. In addition to this, even when you finalize and agree to pay cash/check they will still try to get you to finance. Why? Well because the more they finance the better rates they get in fees. It’s also a fact that when consumers pay with financing, their purchases are typically larger therefore they have a better chance of you buying ALL your windows or the soup to nuts siding project.  

Let’s take a quick look at a basic chart I created to show not only the difference of paying Cash, Card, Finance as a price of the sale but also what you end up paying in the long run.  

So, what’s my best advice to you as a consumer to avoid? If you do not have enough cash, use a low interest HELOC (Home Equity Line of Credit), a 0% CC, or apply for a personal loan through your bank or credit union.