Economics and Replacing Your HVAC

Guide to HVAC System Replacement Financing

So you’ve made the decision (or the decision was made for you!) that it’s time to replace your HVAC system.

Unfortunately you didn’t get the memo with enough advance notice to sock some money away to pay for it in cash. No problem, nearly every dealer offers financing and they make it pretty easy but you should know exactly how it works so you know what the true costs are for the financing you’re getting.

Lending Against Assets

Understanding a lender’s motivation is not rocket science. No matter how good your credit score is, they like to lend against an asset so if the borrower doesn’t pay they have some easy recourse that will cover their loss. That recourse is repossessing whatever it is that you borrowed against; a house, a car, a boat. These are all good assets. An HVAC system — not so much. Who wants to rip out a used HVAC system and try to get some salvage value from it. What this means is that any lender is offering an unsecured loan. This means you aren’t going to be getting the low rate you’re hoping for.

Manufacturer Backed Financing

You may be used to 0% or 2, 3 or 4% financing rates when you buy a car. This is usually due to two factors — once that the lender is lending against a good asset as described above. The other is that there is sometimes a financial tie between the manufacturer and the finance company. A good example of this is GMAC. The General Motors Acceptance Corp. now known as Ally Financial was established to help GM sell automobiles (and make a bit of money in the process). Obviously with a strong link between the manufacturer and the financing company the opportunity exists to provide better rates exists. There is no such link in the HVAC industry — probably mostly related to the lack of a durable asset as described above and the fact that a good percentage of the cost of a total HVAC system replacement is the cost of the installation.

Common Financing Options

So now that we have covered all the issues that prevent us from getting good financing terms on our HVAC replacement investment, where does that leave us? Well fortunately there are options out there, but they don’t carry very great rates. Essentially they aren’t much better than other unsecured consumer debt, ie. credit cards. But at least they look better. You’ve probably seen the advertising for 0% financing from various companies on HVAC replacement systems. There are a few players in this consumer financing market but the terms are nearly all the same and the rates aren’t great even with perfect credit.

The 0% Illusion

Let’s break down what is actually happening when you are offered 0% financing. There are structured offers that the dealer has to choose from in order to offer you financing. When they offer you 0% financing it really means they are increasing the price to cover the cost of the financing. Here are some common ballpark offers finance companies offer to dealers which are packaged and passed on to you.

Consumer OfferWhat You’re Really Paying
0% for 12 Months4.xx% APR
0% for 36 Months9% APR

Don’t believe it — when presented with your HVAC replacement quote ask your installer/service company what the cost would be if you pay cash. There is always a discounted price

Paying by Credit Card

Don’t get too excited about paying by credit card and earning your miles or points. That doesn’t count with your dealer as paying cash. You’ll pay nearly 4% for the privilege. Unknown to many consumers, all merchants pay a “discount fee” for accepting credit cards. The rates are structured differently depending on the risk. High volume low average purchase carries a different risk than low volume high average purchase. The risk for a fraudulent transaction is greatly reduced when you are buying a hamburger at McDonalds versus the local jewelry store. Not only because the the transaction cost is low, but because when credit cards are stolen or used fraudulently the perpetrator doesn’t often beeline for their local fast food joint. Credit card fraud risk is measured just like insurance and is based on actuarials.

So What Should You Do?

The best method for financing any home upgrade is your home equity line of credit. You’ll pay the lowest cash price for the purchase and you’ll pay a low rate for borrowing the money through your bank since the loan is secured by the equity in your home. If this isn’t an option, you should negotiate the best price you can with your HVAC dealer and then apply for their financing. Go for whatever term you are 100% confident is sufficient for you to pay off the obligation but do your best to pay it off as fast as possible — this loan will be structured as revolving credit