If you own a home, chances are there is something you’d like to change. Unfortunately, some home improvements carry a hefty price tag. If you can’t afford to pay cash for the home improvements you’d like to complete, you may consider turning to debt in order to finance your project. If you decide financing home improvements is the right choice for you, should you use a personal loan or another option? Here’s what you should consider.
Is Using a Personal Loan to Pay for Home Improvements a Good Idea?
Using a personal loan for some home improvement projects can be a good idea, depending on your needs and the interest rate you’re able to secure. Interest rates on personal loans can range from as low as 2.49% to as high as 36%, however, average rates range from 10.3% to 32%. A personal loan with a lower interest rate could be very manageable for a home improvement project, but interest rates on the higher end of the range probably will be costly.
Personal loans are usually unsecured loans, which can be helpful if you don’t want to put your home up as collateral, which you must do with home equity loans. Unsecured loans usually do come with higher interest rates, though, so you pay a price. Most personal loans have a fixed term of one to seven years. When budgeting for a predictable monthly payment, a fixed term can be helpful.
If you can’t obtain financing through any means other than a personal loan and your roof is leaking, paying a high interest rate can save you money rather than continuing to let your roof leak, which may cause further damage. However, if you really want hardwood floors installed in your home, a 20% interest rate personal loan will probably cost you more than it’s worth.
Where to Get Home Improvement Loans
As with any loan, you should always shop around to find the best personal loan for your situation. You can shop around locally to get an idea of what your local banks and credit unions can offer. It’s also important to comparison shop with online lenders and peer-to-peer lending sites such as LendingClub. Once you have a good idea of what you qualify for, you can pick the best option for your situation. Depending on the particular home improvement project, some lenders may offer discounts. Home improvement projects that aim to improve energy efficiency or make your home more green can result in additional incentives. For instance, US Bank offers an additional rate discount of 1% for green home improvements and energy efficient purchases.
Alternatives to Consider
Personal loans may not be your only option for a home improvement project. Consider other loans as well as alternative ways to pay for projects that don’t involve debt.
Home Equity Loans or Home Equity Lines of Credit (HELOCs)
A home equity loan or HELOC may give you the cash you need for your home improvement project. In order to take out one of these loans, you’ll need a significant amount of equity in your home, usually 20% after the loan is processed. Either a home equity loans or HELOC may be a good option for a more expensive project that increases the value or extends the life of your home. If you’re considering a smaller project, other options may better suit your needs.
These loans usually come with lower interest rates than personal loans because they’re secured loans. If you default on the loan, the lender could foreclose on your home. Due to the longer term of the loans, usually ranging from five to 20 years, you may end up paying more interest than with a shorter term personal loan with a higher interest rate. Additionally, interest on a home equity loan or HELOC may be tax deductible.
Title I Loans
The U.S. Department of Housing and Urban Development insures private lenders against losses on property improvement loans they make through the Title I Home and Property Improvement Loan program. One benefit of this loan program is it doesn’t require you to have equity in your home in order to be approved.
This program allows a maximum loan amount of $25,000 and maximum loan term of 20 years for single family homes. Interest rates are usually fixed, but loans over $7,500 must be secured by a mortgage or a deed of trust on the property. You must apply for a Title I loan through an approved Title 1 lender.
You may want to consider using a credit card for some home improvement projects. If you’re able to pay off the project in full within a short period of time, such as the next 18 months, and you qualify for a credit card with a 0% introductory APR on purchases offer, you could finance your home improvement project interest-free. Of course, if you can’t pay off the balance in-full before the introductory APR period expires, you’ll pay interest on the remaining balance.
However, if you’re paying a contractor to complete the home improvement project, they may offer a cash discount that you’d miss out on if you pay with a credit card. Additionally, if you don’t qualify for a special lower rate, interest rates on credit cards could exceed the rate you’d pay on a personal loan. Finally, if you only make minimum payments on your credit card bill, you could pay much more in interest than a fixed term personal loan.
Alternatives Other Than Loans
If you don’t want to take on debt, you may want to consider saving up cash before you start your home improvement project. Saving cash for a project means you won’t have to pay interest on a loan, but it may take several months or years to save enough to complete the project.
If you have a minor project that can be completed in phases, you can pay for the project as soon as you have enough money for each phase. For instance, if you want to remodel your bedroom, you could divide the project into three phases such as painting, replacing flooring and replacing light fixtures. You can start the next phase when you have enough money to complete it.
In some cases, local governments or utilities may offer incentives to complete home improvement projects that align with their goals. For instance, electric companies may offer a free water heater if you’re replacing a gas water heater with an electric water heater. Other times, local or state governments may offer incentives such as tax credits to remodel your home with energy efficient solutions including solar panels or geothermal heat pumps.