Cracking the Code Podcast

Author: Thomas Christian | Digital Marketing Coordinator at EGIA & OPTIMUS | April 12th, 2024

Consumer Financing ABCs for HVAC Contractors

When your salespeople are in the home representing your business, it’s important that homeowners trust them to be end-all, be-all experts on HVAC systems and HVAC sales. So when your salespeople offer financing to the customer, it is imperative that they are also able to educate the homeowner with the associated basic financial literacy.

That’s why this week on Cracking the Code, Matthew Bratsis of OPTIMUS Financing shares with you and your employees basic financial literacy terms and how financing can help you sell to more customers, even if they have bad credit.

Audio Transcription (in Beta)

On today’s show, learn the proper way to use financing.

Now, today we’ve got some great content from our financing team and Optimist. They have put together a brand new video series on how to properly implement and use financing in your business. It’s really, really important. Uh, if you’re an EGI member, make sure you take the full eight video course on the EGI website.

And if you’re not a member and you’re watching on Facebook, Click the button below, get a free 30 day trial of all our amazing content. Take it away, Matthew.

Hey, Matthew Bratz is here with EGA Optimist, and I am exciting to bring you this financing course. By the time you get through this course, you’re going to go from maybe not knowing very much about financing. To becoming a great expert on it. You might even teach your own courses. So let’s get you started and we’re going to start with financing literacy.

Financing literacy is super important because these are the most basics, understanding the most basics parts of the entire portion of financing. This is the groundwork. This is the framework on which we can build on things as we move forward. So let’s start with the most basic. basic thing that is going on in underwriting, and that is FICO scores.

We’ve all heard of FICO scores, but really, What do FICO scores mean? Well, FICO score is a standard measurement of a risk associated with a person. They go from 350 to 850, and obviously, the lower the score, the higher the risk, and the less likely you are to be able to get financing or be approved for a loan, right?

The U. S. median score is about a 713, so most customers are over a 700. Right? And what we need to understand with the FICO score is the banks just try to come up with an easy, quick algorithm so that you prove something very, very quickly. So they put a number to it. Most prime lenders are going to approve somewhere between 700 and up to the 850 are going to fall into the prime.

And again, that’s going to be about 60 to 70 percent of the entire industry. Once you start getting below 600, you’re getting into the near prime. And once you get below 620, You’re falling into what would be a subprime. It is much more difficult to get somebody in the five hundreds or lower approved for a loan.

So there’s going to be a significantly higher risk associated with that, which is going to mean more APR, meaning a higher interest rate, shorter term. There’s going to, the banks are going to curtail the risk and potentially not even approve that at all. So that’s kind of what FICO score is looking about.

Now, if we start talking about rates, the rate customers or APR. It’s going to get associated with the FICO score. The higher the FICO score, the lower the interest rate on a risk based pricing that you’re going to get. So I need you to understand, most prime lenders, again, are going to be above 700 and that’s where you’re going to get significantly lower FICO score.

Higher FICO scores are going to lead you to significantly lower interest rates. Once you start getting into the subprime or the near prime below 600, your APR will go up. or interest rate is going to go up, and we’ve seen them go up to the state maximums. In some states, that’s 36, 35%. But those borrowers in that higher interest rate field tend to be much more concerned with monthly payment.

But your APR, which you’ll hear, or interest rate, is just the true interest rates associated with it. Unlike mortgages, there’s not a whole lot of other factors that are going to affect the APR. The interest rate on a consumer financing loan, a home improvement loan that you’re going to be using is going to be a true interest rate.

It’s not going to vary. With mortgages, the interest rate could vary because you’ve got other dealer fees and other things that are flying in there. That’s not going to be the case in home improvement. The next thing I want to talk about is same as cash versus, um, Maybe a no no. So let’s go into same as cash.

What is same as cash? Everybody knows same as cash as there’s a period of time where you don’t have to You might not have to make payments, but there’s going to be no interest This is where it’s a little bit tricky because a lot of times we’ll talk to consumers and we’ll tell you to sell them There’s no interest for 12 months and that’s not necessarily the truth A same as cash literally means that if you pay off a loan within the period, whether that’s 6 months, 12 months, or 18 months, they could go up to 24, but you don’t see that.

The most common ones are 6 months or 12 months. If they pay it off within that period, period, all the interest gets waived. This is a real, very, very important, uh, issue that you need to be able to explain to a consumer if they ask this question, many times, it’s not a no interest, right? And it goes by terms with no interest or a no, no, you’ll hear these things.

A same as cash loan. has interest accruing from day one. So when they get their credit card statements, or their statements coming from whichever lender they’re set up with, they’re going to see interest is accruing. If they pay that loan off within that period, within that 6 to 12 months, or whatever the term period is, All the interest that has accrued gets waived.

If they do not pay it off in that time period, the interest that has accrued from day one continues all the way through the rest of the loan and doesn’t get waived. So that’s what’s important to know about Same as Cash. It is the most popular loan on the market. Right? But it’s a type of loan that has no interest, but it really isn’t truly a no interest.

It is just interest accruing and it gets waived at the end of the time. Now what we do want to talk about is the single most common loan, which is a 12 months interest fee. No, no, right? And it’s going to be going by no, no. So there’s no interest, no payment, no deposit made front. This is one of the best loans.

Most common loans, and you certainly want to make sure you get this as part of your offerings. Twelve month, interest free, no no is what we call it. No payments for twelve months. If they don’t pay it off within that 12 month period, it resorts to anywhere from a 5 to 10 year loan, and they go on a monthly payment, and interest that accrued from day one will continue on all the way through.

But if they pay that off within 12 months, the interest gets waived and you don’t have to worry about making payments. The thing you want to talk about when you’re dealing with a consumer on this one, is you’re putting them on a 12 month no no or the interest free loan, many times you want to make sure that They understand that the smartest thing they could do is take whatever that balance is.

Let’s say it’s 12, 000 because I don’t feel like doing any difficult math. It’s 12, 000. They pay 1, 000 a month so that at the end of the 12 months, it’s paid off. What you don’t want to do is have an upset consumer that got into a 12 month and didn’t realize when their 12 month was over. And then they’re like, well, can you make an exception?

And the banks are not going to make an exception. That’s what that 12 month is. Is is for many times. I’ve heard some contractors many times Document it themselves and at the 11th month They send a notification to the consumer just kind of as a heads up that we can get this thing paid off You might want to consider doing that but this is an absolute loan that you absolutely must have it is the number one loan in the entire industry Consumers love it.

They do it. This is where they shop when they’re going for home depot This is like this Consumers are very, very interested and very, very comfortable with this program. You want to make sure you’re offering this one. All right, the next thing we want to get into is the true zero interest. So what is a true zero interest?

Now these loans are equal payments deferred interest. These truly are a zero interest. Interest does not accrue. This is not like the same as cash where interest is accruing and you pay it off, it gets waived. This truly has a zero percent interest rate. The dealer fees that we’re going to be talking about in a little bit later tend to be a little bit higher with this.

Right? Because basically, you’re pre paying all the money that the bank would make in dealer fees. Probably passing that on to your customer. We’ll talk about that when we talk about later on in the, in the modules when we talk about managing your dealer fees. But this has a significantly higher, um, dealer fee because they’re making the 20 percent up front.

But you’re offering a consumer a true zero percent. Now, there’s a monthly payment with this, and basically, it’s not a, a no no, where it’s no monthly payments. It has a monthly payment, and the monthly payments tend to be a little bit higher. So the negative to this is that, if you’re borrowing 20, 000 over the course of a two year zero percent interest, you’re probably paying 15, 18 percent of a dealer fee.

So that’s being passed to your consumer, so the pricing is a little bit higher. They’re taking that balance and just dividing it by the amount of term, and that’s your monthly payment. There is no, there’s no like waiving of interest. Now, the negative, the biggest negative to this one is with a zero interest, if they miss a payment, if they default, if there becomes a problem, the zero interest will go away.

And then that goes to a revert fee, which we’re going to be talking about. That’s going to be the next thing, which is. Default rate or the penalty when you have that zero percent or even you know any kind of special program Especially those zero percents and you miss it. There’s what we call a default rate or a penalty, right?

this is becomes the new interest rate after they’ve lost so you might be on a zero for 36 months and Something might happen. I don’t know something a family issue might happen to end you forgot to make a payment Whatever the bank is going to immediately charge you they’re going to say you’ve defaulted on that zero it you And it’s going to resort, right, or revert to a 17, 18, in some cases, 26, 27, 29 percent interest rate.

That’s the penalty you have. So. Many times the 0 percent interest rate is something that people have to monitor really closely. It’s great to be able to offer customers 0%, but you’ve got to be very careful about the default rate and the penalty because it will revert to a significantly higher rate if they don’t make it, uh, make the payments on time or if they miss it.

The last thing I want to talk about, and I think one of the most important things we want to talk about when it comes to finance literacy, is the difference between an installment loan These are the two types of loans that really are in the industry that you need to make sure you understand. And they both have some really great benefits, and they both have some negatives to them.

So let’s talk about installment loans first, because that really is the most common used loan. The installment loans are similar to auto loans. They have a fixed interest rate. The interest rate isn’t going to vary on the installment lanes. There’s really on installment loans, excuse me, there, there’s not really very much of a revert rate, right?

When they sign up for a 999 or 1299 for 10 years, or even up to 15 years, it’s going to stay that even if they, they default on it and they run a little bit late, the interest rates are not going to change. What’s also not going to change is the ability to offer a no payment, no default. Uh, interest solution, both installment and revolving have the ability to give you zero interest.

Installment loans are the only programs that have the ability to offer you a no payment solution. And we’ll talk about that with revolving. But with the installment loan, you’ve got more promotional programs that consumers really like, which is the no payment. On a revolving credit, Think of a credit card.

When the crash happened, I don’t know, maybe it’s not, crash is not the right word, maybe it’s more of a, the challenge that happened in 2008. Some of the laws changed around revolving credit, specifically in relation to credit cards, but it affected the home industry, the home improvement industry. With revolving, right?

So with revolving, you can have a no interest program, but you have to have a monthly payment. And your monthly payment is a percentage of your balance, normally somewhere around 2 percent or higher, maybe 3 percent of your outstanding balance. So the payments tend to be a little bit higher, and you don’t have those programs where you Um, can tell the customer, don’t worry about it, you don’t have to make payments.

You will have to make a payment. The advantage to a revolving is that it’s an open line of credit for the entire term that they’re making their payment. So if you are the type of organization that wants to re market to your customers, or you want to do a project now and then maybe a year later come back and do some duct cleaning or do some other projects, having them on a revolving credit program is a really good And it’s not a, it’s not a way to, to situate you know, an inquiry in the future.

You’re not actually officially required to do that. It’s a way to do it, but it’s not a, it’s not a way to easily do it. It’s a, it’s a way to do it that it’s not annoying at all or as simple as it can be. And it’s a way to, to have, to have people, uh, pay attention to that. So, again, The advantage of the revolving is if you’re going to re market to customers, if you’re going to come back and they want to do additional work, that’s a great program.

If that’s not in the cards, if that’s not something that you’re marketing to, then the installment loan is probably where you’re going to want to go because it gives you much more certainty for a consumer to make a normal monthly payment. Their interest rate is not going to go up. Adjust at all, and you’ve got the promotional programs that consumers like, which is the no payment solutions.

The number one program we have, again, I’ve mentioned this a couple times here, the number one program we’ve had is a 12 month, no interest, no payment HVAC. When an HVAC system has to be replaced, consumers haven’t been saving for that. They’re not really ready to be like, all right, I’m going to take a 200 monthly payment for that.

They love the no payment options. So we tend to glean very heavily on the installment loan. But revolving credit is certainly something you need to be interested in because for those follow up customers, it’s a great solution. Awesome content there as always. Now if you like this content, please share it with your friends on Facebook.

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