Are you planning a large home improvement project that will involve using a contractor? Home improvements can be costly, and you may be concerned about how to meet your contractor payment schedule. If you haven’t arranged for home improvement financing, your contractor may offer to finance your project. Contractor loans often appear to be attractive and convenient, with work and money coming from the same source. When something looks too good to be true, however, it usually is.

Understanding Contractor Loans

Contractors sometimes offer financing to their customers. Unfortunately, contractor loans often come with huge disadvantages over other types of financing:

• Contractor loans may be financed through third party lenders who offer a commission to the contractor. You’ll end up paying for that commission with higher interest rates and fees.
• Contractors sometimes work with sub-prime lenders, and you could get stuck with loads of hidden fees that are not easily understood in your contract’s wording.
• If your contractor loan is arranged through a third party lender, he could have cash for the full cost of your project in his hands before work even begins. If the work turns out to be faulty or incomplete, you’ll have no money leverage to see that corrections are made.

If a contractor you don’t know knocks on your door to offer you work and financing, be especially wary. Dishonest contractors have been known to scam customers into signing up for substandard home equity contractor loans with unaffordable payment terms.

How does this happen? The contractor asks the homeowner to sign blank paperwork for the sake of speedy approval. Before he knows it, the homeowner is responsible for either making a huge payment to the contractor each month, or he is at risk of losing his home.

Arranging Contractor Payment Terms and Schedules

Experts strongly recommend arranging your home improvement financing through a reputable lender before you hire your contractor. You’ll also benefit by carefully checking references for all contractors you are considering. When you have selected your contractor, here are a few tips to remember to help your project go smoothly:

• Don’t agree to a contractor payment schedule where he’ll receive a large sum of money before starting the job. Make your down payment as small as possible. (Some states limit the amount a contractor is allowed to ask for up-front. Check with your state or local consumer agencies to learn about the laws in your area.)
• Don’t make your final payment to your contractor until you are sure you’re satisfied with the work.
• Get everything in writing, including all work to be done, costs and when each payment installment is completed. Your contract should also contain an estimated start and completion date for your work.
• If your total bill is significantly higher than your estimate, you may not be responsible for paying the whole thing. Some state and local laws do not allow a final bill to exceed a contractor estimate by more than a specified amount or percentage. Contact the consumer agency in your area to find out if you are covered.
• See if you can arrange to make your contractor payment terms contingent on specific work completed, rather than due on calendar dates.