Should You Use a Personal Loan for Home Improvement?

Should You Use a Personal Loan for Home Improvement?

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If you’re thinking of making a home improvement, you probably already know that even small alterations can eat up large sums of cash. One way to make your project more affordable is to take out a home improvement loan, which is simply a personal loan that’s specifically tailored to help cover renovation costs.

A personal loan for home improvement might be a good choice depending on your needs and the interest rate you’re able to secure. But other financing options might be more affordable in the end. Take a look below to see how a home improvement loan works, and whether it’s the right choice for you.

What is a home improvement loan?

A home improvement loan is a personal loan that’s used to finance home renovations and repairs. You may be able to use it for a large project like a kitchen or bathroom remodel, refinishing a basement, building a garage or installing a swimming pool. The loans can also be used for emergency repairs and smaller jobs like outfitting your home with new windows or solar panels.

Some lenders market home improvement loans separately from their personal loan offerings. Here are the key features these loans share:

  • Usually require no collateral. Like most personal loans, home improvement loans are unsecured. This means they won’t require collateral, so your property won’t be at risk if you’re unable to make payments.
  • Higher interest rates than on secured loans. Like other unsecured loans, home improvement loans tend to come with higher interest rates than secured loans like home equity loans or home equity lines of credit (HELOCs), where your home is used as collateral.
  • Fixed APR and monthly payments. Home improvement loans typically come with fixed interest rates and monthly repayments over a set number of years. That means you’ll know exactly how much your loan will cost you, and you can budget accordingly.
  • Fast, lump-sum funding. A lender may be able to deliver a home improvement loan into your bank account in as little as one to three days. Loan amounts can range from $1,000 to $100,000.

Is using a personal loan to pay for home improvements a good idea?

It depends. Since they are unsecured, home improvement loans often come with higher interest rates than home equity loans and HELOCs. But to use those financing options, you’ll need to use your home as collateral. You’ll also need to have enough equity in your home – the difference between how much you owe on your mortgage and what your home is worth. The size of your equity will determine how much you can borrow.

With a home improvement loan, you won’t need equity and you don’t risk losing your home. But if you do default on your loan, expect a major drop in your credit score – and a default notice to possibly stay on your credit record for up to seven years.

Applying for a home improvement loan is often less complicated than applying for other financing types, like home equity loans, especially if you have good credit. In that case, it might be mostly a matter of showing proof of income and employment. Even if you have poor credit, a personal loan still might work. You’ll almost certainly get the best interest rates with good to excellent credit, but some lenders may still offer you a loan if you have a good job history and use credit responsibly.

Pros and cons of home improvement loans

Home improvement loans can deliver money to your bank account in days, and you’ll pay it back with predictable, fixed monthly payments and without worrying about collateral. With some lenders, you may also be able to pay fewer fees (or none at all) compared to other types of financing.

Still, interest rates on home improvement loans vary widely, from around 6% to 30% or more. That’s because the rate a lender quotes you will be based on a mix of factors, like the amount of money you want to borrow, your income, credit score and how much debt you carry compared to your income.

With a home improvement loan, you’ll most likely be able to borrow less than you would with a home equity loan, so if you have a major improvement project in mind, make sure it will cover your needs. As with any financing option, you’ll also want to make sure that any changes you do fund really will add value to your home and won’t be outweighed by what they cost.

What To Consider With a Home Improvement Loan

ProsCons
No risk of losing your houseInterest rates can be high
Funding is fastNo tax benefits
Low feesLower maximum loan amounts

How to choose a home improvement loan lender

Be sure to shop around, as lenders offer widely varying interest rates and fees. Some also promise to close on loans faster than others. In general, look for the following:

  • Low APR. You’ll need excellent credit to receive the lowest rates.
  • No fees. Some lenders offer home improvement loans with no fees. That means you may be able to avoid prepayment penalties, late payment fees and origination fees, a processing charge that’s typically 1% to 8% of your total loan amount. Double-check your payment terms before you commit.
  • Positive reviews. Check online for reviews of lenders that offer personal loans; reputable lenders often have long track records. You’ll find reviews at both ValuePenguin and LendingTree.

Alternative ways to pay for home improvements

Depending on your financial situation, you may be able to find more affordable help elsewhere, like from a local or county housing department. To see what’s available in your state, start with the Department of Housing and Urban Development (HUD) website. Also consider these options:

Budgeting and paying in cash

Especially for smaller projects, it can be smart to save up money to pay for home improvements with cash. You won’t pay any interest or fees. Some banks and credit unions offer special, interest-bearing savings accounts that let you sock away money in a designated fund.

How it compares with a home improvement loan: If you can swing it, paying for a home renovation or repair out of pocket is the cheapest and best way to pay for home improvements. It can take time, though, to save up enough money – and that can mean delaying the work.

Home equity loans or home equity lines of credit (HELOCs)

If you own your home and have built up substantial equity, you may be able to use either a home equity loan or a HELOC to access more funds for a home improvement project than with a home improvement loan.

A home equity loan lets you borrow a lump sum that might be up to 85% of equity you have in your home. It typically comes with a fixed interest rate that’s usually lower than for a personal loan and a longer repayment term (often five to 30 years versus two to seven years for a personal loan.) With a home equity loan, it’s easy to predict what you’ll owe for a home improvement project. However, expect a lender to look closely at both your credit score and your debt-to-income ratio (DTI).

HELOCS operate more like a credit card. Your lender gives you a maximum amount you can draw on over a set period of time (typically 10 years). You then enter into a repayment period, where you pay back the amount you borrowed. HELOCS come with adjustable interest rates, but also lower interest rates than personal loans.

As with personal loans, fees for both home equity loans and HELOCS could potentially add up. For a home equity loan, expect closing costs similar to what you paid for your mortgage. Still, the interest you pay on both these financing alternatives is often tax-deductible. That’s not the case with personal loans.

How they compare with a home improvement loan: A home equity loan might be significantly less expensive if you have enough equity in your home, few other debts and an especially big project to fund. A HELOC might offer a more flexible way to regularly pay for home renovation costs, especially if you don’t know exactly how much you’ll need in the end. Consider a home improvement loan for less expensive jobs. That’s because both home equity loans and HELOCS often come with minimum loan amounts, like $10,000 for HELOCS, or $25,000 for a home equity loan.

FHA Title 1 Loans

A FHA Title 1 loan is a home renovation loan that’s issued by a bank or other lender but which is insured by the Federal Housing Administration. You can use it for any project that makes your property more livable or energy efficient, as long as the upgrade is a permanent part of your home and isn’t a luxury item. That means replacing a plumbing system or a built-in appliance will probably qualify, but not installing a swimming pool or outdoor fireplace. For small loans ($7,500 or less), you won’t need to put up collateral.

To qualify for an FHA Title 1 loan, you won’t need a minimum income or credit score, but a lender will look at any outstanding debts you have, your payment history and whether your income is large enough to pay off the loan. To find an approved lender, check this page on the HUD website.

How it compares with a home improvement loan: Because of the federal guaranty, lenders generally offer lower interest rates for FHA Title 1 loans than on home improvement loans, and the rates are similar to those for home equity loans. You might find it easier to qualify for this type of loan than for a personal loan, but for single-family homes, FHA Title 1 loans are capped at $25,000. If you think your home improvement will be extensive – and are looking at more than basic upgrades – a personal loan might serve you better.

Credit cards with a 0% interest introductory offer

Some lenders offer balance transfer credit cards that let you avoid paying interest for a certain amount of time – often up to 18 months – as long as you pay back your balance in full by the time your grace period is over. However, if you’re still carrying a balance at that time your card will be charged a relatively high interest rate.

How it compares with a home improvement loan: A balance transfer card could be an excellent way to pay for a home improvement – if you could manage to pay off the balance before the introductory period expires. But home improvement costs can often be as unpredictable as they are large, so this might not be a realistic option for most borrowers.

In general, credit cards – with variable interest rates that are typically high – qualify as the most expensive way to finance a home improvement. Using a credit card to pay for a home improvement could throw you into an endless cycle of debt. You’re far more likely to get a lower interest rate and peace of mind with a home improvement loan, especially if you have strong credit, a good income, and relatively few other debts.

Andrew Dunn is an award-winning mortgage and finance writer with a decade of experience covering the industry for publications including The Charlotte Observer and Business North Carolina magazine. His work has been recognized numerous times by the Society of American Business Editors and Writers and the N.C. Press Association.