August 9, 2019

Who wouldn't want free financing?
........But we all know there is no such thing as a free lunch or free financing.

I recently bought a $2,000 mattress and when the salesman offered me "free" financing for 12 months, I said "why not?" I knew two things - 1) I was most likely paying an inflated price because the merchant (or manufacturer) was assuredly passing the cost of this program on to all their customers and 2) I didn't care because I had the cash or room on my credit card and would have purchased the mattress anyway, regardless of the zero percent offer.

Since I was a cash buyer I knew I could afford the high monthly payments and I didn't get a "rebate or finance" option, so why not use their "free" money. I was, in reality, a cash-customer, not a financing customer, and the short term zero percent did not really influence my buying decision one way or the other.

Conclusion: Customers who take a short term zero percent offer are invariably cash customers who would would have bought from you anyway.

  • If it is a true 12 or 24 month plan with a payment designed to pay it off in that period and the customer can afford the high payments of a short term loan, they could most likely pay with cash today, but simply choose to use the "free" money". This is not expanding your market or increasing your close rate as they are already "cash buyers".
  • If it is a deceptive "teaser" program with zero percent for a short term that converts to 18% or 25% or 32% after the promotional period, what intelligent consumer would take that unless they know they could pay it off before the promotional period ends and what kind of legitimate merchant would want to be associated with such a program?

What about longer term (60 and 72 month month) zero percent financing like we see in the auto industry and now more frequently in HVAC and other products lines? It's a no-brainer for the consumer, right? Wrong. Look at the real cost and its impact on your bottom line. Unless the program is being subsidized by a utility or government, the cost of these program can range from 5% to 18% of the product cost. That's between $400 to $1300 on a typical HVAC sale!

  • Someone is paying that egregious cost to buy the rate down to zero percent. Are you eating it as a cost of doing business? Is the manufacturer? Is the customer paying a higher price? If so you are a ripe target for a class-action lawsuit on undisclosed finance charges.
  • Is it really helping you increase your close rate and addressing the true "monthly payment buyer" with the lowest possible payment?

Conclusion: Customers are either paying a higher price (undisclosed finance charge) or the contractor or manufacturer is absorbing an enormous cost which will invariably offset any profits from increased sales.

What's the solution? Always offer every customer a longer term, low monthly payment option on every proposal. Make sure the financing product is a true fixed rate installment loan with no penalties for early prepayment and not a deceptive credit card-type product which may look like a fixed rate but can adjust if the customer is a day late on their payment. If you choose to offer programs with rate buy downs make sure they are reasonable so you can afford to fully absorb the costs. It is illegal to pass those costs on to the customer.

National Energy Improvement Fund, LLC (NEIF), a national leader in energy improvement financing, is a mission-based, contractor-focused lender promoting energy savings and home comfort by increasing the affordability of energy efficiency and comfort improvements for consumers and businesses. NEIF was founded and is led by energy efficiency finance pioneers Peter Krajsa and Matthew Brown. It's EnergyPlus Loan program provides True Fixed Rate™ financing for most types of energy efficiency, remodeling and other home improvements for work performed by a network of high-quality NEIF Approved and Preferred Contractors.