This is a longer version of an interview that appeared in the September issue of REPLACEMENT CONTRACTOR.
Replacement Contractor: Home improvement companies used to finance as much 80% of the jobs they sold to homeowners. Today most would say they're financing far fewer jobs. What's the status of financing in the home improvement industry?
Brandon Perry: It's catch as catch can. The financial industry is muddling through the aftermath of the banking crisis and credit crunch. Secured lending — which used to be big — has eroded due to the loss of equity. People are staying in their homes, but if they want to improve them they often don't have the equity to tap into or can't get a second mortgage or a home equity line of credit. So the pressure has gone back to the unsecured side.
RC: How available is financing right now?
BP: If a contractor is having trouble with financing or can't find it, it is out there. It requires a little more effort on the part of the financing company and the contractor to get a homeowner financed. It's not what it was four or five years ago. But it is still available, and we work hard to make it available. And it still should be a part of a home improvement company's business plan.
RC: Are the interest rates and term limit on the loan different?
BP: The terms for [unsecured loans] have changed drastically. Risk is up. Wall Street doesn't want to touch those. So they're shorter term and at higher interest rates.
RC: Many home improvement companies complain they can't get their jobs financed. Why?
BP: There is money there and it may not be the same source for every region or metro area. However, there are options for wherever your business is operating. With my company, for instance, we have multiple sources and affiliation with national banks. But those financing sources may not lend in every nook and cranny of every area of the country. We do have coverage in every state.
RC: Companies have learned to sell jobs for cash. Why would they now want to go back to selling on financing?
BP: Let's say people are sitting on cash, and they're looking at putting a sunroom on the back of the house. It's a bigger decision when you have an unsettled economy and everyone is worried about what will happen with the debt ceiling and unemployment. Suddenly they're maybe not so sure they want to spend $30,000 of their savings. Financing gives them a comfort level so that they're not tapping into their hard-earned savings. They can spread it out into affordable payments. It's easier for homeowners to get their minds around monthly payments, say $300 versus wiping out their savings. It's also easier to move to a higher-end product. You'll get a bigger sale out of a financed deal than a cash deal.
RC: What's the situation with credit scores and turndowns? What kind of credit score does a homeowner have to have to get unsecured financing on, say, a $15,000 or $20,000 siding job or roofing job?
BP: Right now on a W-2 borrower, they would need 640 to get into an unsecured program. That 640 score only gets you in the door to be looked at. You're still going to be underwritten depending on your credit score, your ability to repay the loan, your disposable income, and on public records.
RC: What public records and why?
BP: For example, it's possible that somebody with a credit score of more than 700 points might have been involved in bankruptcy two years ago. They may have rebuilt their credit. We've had people contact us and say: "I have a 720 score, why was I turned down?" They fail to mention a tax lien, for example.
RC: Just how much credit would be available to a homeowner seeking an unsecured loan?
BP: The scores can go as low as 640 on one of my unsecured programs, with a loan amount up to $25,000 and that's available in 47 states. I have another one that has a base of 660 and that will go to $35,000.
RC: What kind of interest rates are you offering, or seeing, in the market?
BP: Keep in mind that there are risk factors that get taken into consideration as well as the term of the loan. So if you want to take it out to a five-year term, you're going to pay more because you are extending it. At a three-year term, you might get 7.4%, at five years it might be 9.5%. As the loan amount goes up, we tie in the other risk factors. You have to understand what goes into that rate. It's completely unsecured. They're basing it on previous payment history and credit scoring models and the job and the income.
RC: Isn't it more common for those interest rates to be in double digits?
BP: Realistically, it could be in the teens. Sometimes I need to remind borrowers what unsecured money means. They hear the word but they don't think about what it means. Say you're selling a roofing or a window job for $10,000. If you default on the loan, the contractor can't take the windows or roof back. People are trained and used to using financing to buy cars, RVs, jet skis ... All are secured by the thing they're collateralizing, which they can repossess and sell back on the auction market and get a portion of the proceeds back. That's not true with home improvement. You can't repossess a roof or windows. Therefore, the risk is higher and the rate is higher.