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Attention Home Depot shoppers: Home Improvement Loans on aisle 7

The next time you trudge through those enormous orange doors in search of a new faucet, crown molding or exterior primer, The Home Depot is fixing to offer you a product of a different sort -- a home improvement loan.

Do-it-yourselfers with more plans than money can saunter into any of the nation's Home Depot stores coast to coast and apply for a consumer loan from $3,000 to $30,000 on the spot. The loan is only active for six months and must be spent on Home Depot products and services, but with the right credit history you can take up to 10 years to pay it off, with no prepayment penalty.

The Home Depot loan, the first of its kind in the retail industry, is offered through GE Capital Financial Inc.

In a year-long study at 70 stores, Home Depot found an under-served market between the do-it-yourselfer who puts a few hundred dollars on his Home Depot credit card and the customer who wants to remodel her kitchen but may not have cash in hand or want to hassle with a home equity loan or other financing.

"What we found was our customers wanted a vehicle to make large purchases," says Heather Wilson, Home Depot credit marketing manager. "The idea is that the Home Depot consumer card is for daily purchases and promotions, and the home improvement loan is for major purchases like a new kitchen or bath."

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The do-it-yourselfer loan
Like its credit card, Home Depot's home improvement loan actually represents a line of credit against which the customer may make store purchases. Unlike the credit card, the loan closes after six months, at which point the customer faces a fixed monthly payment for those purchases based upon competitive loan rates for the term of the loan.

One-stop financing
Wilson says that according to a 2002 Simmons survey, 72 percent of Home Depot customers are homeowners so it's only logical that, along with materials, installation and design help, Home Depot offers its customers financial assistance with their home improvement projects.

Steve Davidson, an economist with America's Community Bankers, agrees the concept is a healthy one.

"Anything that provides convenience for the financial services customer is positive. Certainly, banking anytime and anywhere is the coming thing," he says.

That said, he has some reservations about consumers who might be tempted to buy now and not pay later.

"The consumer would have to be cautious. Are these loan customers people who are maxed out on their credit cards?" he wonders. "Maybe this is an easier way than applying for a credit card. One would hope that the underwriting is as careful as conventional financial institutions would do. If the worst scenario were to occur, it would tend to paint the entire financial services industry in an unfavorable way."

Where retail and banking meet
No one is predicting that loan programs will start to crop up like toadstools, even among major retailers. The home improvement industry represents a niche market where, at least in the estimation of GE Capital, the risk of offering unsecured loans of up to $30,000 is mitigated by the credit and demographic profile of a well-established customer base.

The move is a savvy one for Home Depot, according to Bob McGoffin, professor at the Graduate School of Banking at Louisiana State University.

"For quite some time, we've been in the retail business as banks, as financial services retailers," he says. "The industry as we've known it is changing, and it doesn't surprise me that retailers are doing some of the things that banks have done, any more than it should surprise you that banks are doing some of the things that retailers have done."

McGoffin figures if the bank on the corner can start offering insurance and rent part of its space to Starbucks, why shouldn't retailers offer loans?

"We're really looking at what we can put together for our customer base to keep their loyalty. That's exactly what Home Depot's doing and I take my hat off to them."

Jay MacDonald is a freelance writer based in Florida.

-- Updated: March 10, 2003
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See Also
When financing a remodeling job, don't turn Tool Time into Fool Time
Biggest bang for your home improvement buck
Quick rules of thumb when you remodel for resale
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