Contractor Financing Hidden Fees: Where the Cost Moves To

A rate below what a bank would offer is rarely a subsidy — it is usually a price that has been moved from the interest into the principal.

A contractor offers to arrange the financing, and the rate quoted is
noticeably below what a bank would offer for an unsecured loan of that size.
That is not a mistake and it is usually not a subsidy. It is a price that has
been moved from one place to another, and the useful skill is knowing where it
went.

Contractor Financing Hidden Fees: Where the Cost Has Moved To

The single most important idea in this subject is the dealer fee. When a
lender offers a below-market rate through a contractor, the contractor typically
pays the lender a fee to buy that rate down — and then recovers it in the
contract price. The customer sees an attractive rate. What they do not see,
unless they ask, is that the same job quoted for cash would carry a different
number.

Nothing about that is illegitimate. It is a pricing structure, and for some
households it is the right one. It only becomes a problem when the two halves
are compared as though they were independent, so that a low rate on an inflated
principal reads as a better deal than a market rate on the real one.

The question that reveals it

Ask for the cash price, in writing, for exactly the same scope of work — and
ask before financing is discussed, not after. The gap between that and the
financed contract price is the cost of the rate, expressed as money rather than
as a percentage. Once you have both numbers you can compare the financed offer
against borrowing the cash price elsewhere, which is the only comparison that
means anything.

It is the same discipline that makes any other energy offer comparable:
convert everything into figures that describe the same thing before comparing
them, as in
comparing supply offers.
A number you cannot restate in the other side’s units is not a comparison.

The other places cost hides

The two-payment structure deserves its own paragraph

A common arrangement quotes a low monthly payment on the assumption that a
substantial lump sum will be applied to the principal by a specific date, after
which the payment stays low. If that lump sum is not applied, the loan
re-amortises and the payment steps up — sometimes considerably — for the rest of
the term.

Where that lump sum was expected to come from matters enormously. Structures
built around an anticipated tax benefit depend on that benefit existing, on the
household’s own tax position, and on the timing lining up, and the tax landscape
for residential energy work has changed. So the question is not “will I get the
credit” but three separate ones: what exactly does this contract assume, what
happens to my payment if the assumption fails, and who has verified that the
assumption still holds. Confirm the current position with a tax professional and
the primary source rather than with the salesperson — a caution the site’s own
piece on
the New York State credit
frames the same way.

Compare against the alternatives, not against nothing

Contractor-arranged financing has real competition, and the comparison is
worth doing even if you end up choosing it anyway.

• Paying the cash price, which is the baseline every other
  option is measured against.
• A conventional loan from your own bank or credit union,
  where the rate is higher on paper but applies to the un-inflated
  principal.
• A programme-linked arrangement such as
  the on-bill recovery loan,
  which behaves differently again, particularly around what happens when the
  property changes hands.
• Rates published for the market as a sanity check on
  whatever you are shown, of the kind collected in
  solar loan interest rates.
• A lease or a purchase agreement rather than a loan, which
  is a different product entirely with its own consequences at sale — the ground
  covered in
  buying, leasing or subscribing.

Selling the house later

This is where financing decisions come back. A loan secured against the
property, a lien filed by a lender, or an agreement that has to be assigned to a
buyer all become someone else’s problem to approve at exactly the moment you
have least leverage. Ask what is filed, against what, how it is released, and
what a buyer would have to do — before signing, when the answer is free.

The same class of surprise turns up in offers that sound like there is
nothing to pay at all, which is why
what “free solar” actually means
is worth reading alongside any financing conversation.

Six questions, before anything is signed

• What is the cash price for this exact scope of work, in writing?
• What is the total amount financed, and what does it include beyond the
  work?
• What is the payment for the whole term, month by month, including after any
  introductory period?
• What does the contract assume I will pay toward the principal, by when, and
  what happens if I do not?
• Is there a prepayment penalty, and how is interest calculated?
• What is filed against my property or equipment, and how is it
  released?

None of these are adversarial questions and a straightforward salesperson
will answer all six without difficulty. The answers, taken together, convert a
monthly payment into a price — and a price is something you can compare.

Frequently Asked Questions

Why is contractor-arranged financing cheaper than my bank?

Usually it is not, once the whole picture is visible. A below-market rate is commonly bought down by a dealer fee the contractor pays the lender and then recovers in the contract price. The rate is genuinely low; the principal it applies to is larger than the same job would cost in cash.

What is a dealer fee?

A payment from the contractor to the lender that buys down the interest rate offered to you. It is legitimate and common, and it is recovered through the price you are quoted. The way to see it is to ask for the cash price for identical scope, in writing, and compare that against the financed contract price.

When should I ask for the cash price?

Before financing is discussed. Once a financed structure is on the table, the cash figure becomes a number produced in response to your question rather than the price the job was quoted at. Asking early and in writing gets you a cleaner comparison and costs nothing.

What is a two-payment or re-amortising structure?

An arrangement quoting a low monthly payment on the assumption that a substantial lump sum will be applied to the principal by a set date. If that payment is not made, the loan re-amortises and the monthly amount steps up for the rest of the term. Ask specifically what the payment becomes if the lump sum never arrives.

What if the structure assumes a tax credit?

Treat that as three questions rather than one: what exactly does the contract assume, what happens to the payment if the assumption fails, and who has verified that the assumption still holds. The tax landscape for residential energy work has changed, so confirm the current position with a tax professional and the primary source, not with the salesperson.

What should I compare a financing offer against?

The cash price first, then a conventional loan from your own bank or credit union applied to that un-inflated price, then any programme-linked arrangement available to you. Comparing a monthly payment against nothing is how a structure with a low rate and a high principal comes to look like a good deal.

Does financing affect selling the house?

It can, substantially. A loan secured against the property, a lien filed by a lender, or an agreement requiring assignment to a buyer all become live issues at closing, when you have the least leverage. Ask before signing what is filed, against what, how it is released, and what a buyer would have to do.