Working on Home Improvement Plans? A Personal Loan May Help

Highlights:

• A personal loan is a line of installment credit that can be used to cover a wide range of expenses. It can be a useful option when attempting to finance a home improvement plan.
• Personal loans for home improvement projects are unsecured, meaning they do not require a borrower to put up their home as collateral. They also typically come with lower interest rates than most credit cards.
• Personal loans are typically issued in amounts of a few thousand dollars, so they may be a good option to fund low- or mid-budget home improvement projects but may not cover more significant work.

For many homeowners, home improvement is a vital — but expensive — step toward creating a dream home. If you have plans for an upcoming renovation but limited savings to draw on, you might consider applying for a personal loan.

What is a personal loan and how can it be used for home improvements?

A personal loan is a line of installment credit that allows you to borrow a lump sum of money from a lender and pay it back in fixed amounts or “installments.” If approved for a personal loan, you will receive a lump sum of cash, which you then repay in regular intervals, typically monthly. Personal loans charge borrowers a fixed APR, or annual percentage rate, on top of the principal loan amount.

Personal loans are typically unsecured, meaning they don’t require collateral. Collateral is any asset the borrower agrees to surrender to the lender in the event they can’t repay what they’ve borrowed. This makes personal loans different from two other popular options for financing a renovation: home equity loans and home equity lines of credit (HELOCs). Both use your home as collateral to secure the loan.

How will a personal loan help with home remodeling?

Personal loans can be helpful financing options because they do not generally have limits on how they can be used. Borrowers can use them for anything from consolidating credit card debt to funding a wedding and, of course, home improvement projects. Depending on the borrower’s credit scores, personal loans also typically offer lower interest rates than credit cards do.

However, because personal loans are unsecured, they are generally offered in smaller amounts than other financing options. Personal loans are typically issued in amounts of a few thousand dollars. Select lenders may offer personal loans totaling more than $50,000, but this depends heavily on the borrower’s credit scores. This means a personal loan will likely fund a low- or mid-budget home improvement project (such as replacing windows or updating an old appliance) but may not cover more significant and costly work (such as a full kitchen renovation).

The pros of using personal loans for home improvements

When you’re trying to fund a home improvement project, personal loans may have certain advantages over other financing options:

• No collateral required. Personal loans are unsecured, meaning they don’t require you to put up your home as collateral. Therefore, if you default on what you borrow, your home cannot be seized by the lender (though you are still likely to damage your credit scores and face other consequences).
• Lower interest rates. Personal loans usually have lower interest rates than other financing alternatives, such as credit cards.
• Fast financing. Personal loans typically have a short turnaround time between application and payout, so you’ll get access to your money quickly if you’re approved.
• Overall value add. Home renovations you make using a personal loan can improve your property’s value, which may help offset the costs associated with borrowing money.

The cons of using personal loans for home improvements

Be aware of these potential downsides when considering a personal loan to fund home improvements:

• Expensive fees. Administrative fees, origination fees and late payment penalties are a few charges that may drive up the overall cost of your personal loan. Don’t forget to account for these expenses when calculating your loan’s total cost.
• Lower loan amounts. Personal loans are usually offered in smaller amounts than other financing options, such as home equity loans or HELOCs. This may limit the size of your home improvement project.
• Interest rates determined by credit scores. Lenders generally use a borrower’s credit scores to determine the interest rate on any loan. Borrowers with fair or poor credit scores may face higher interest rates on any funds they borrow, which could make a personal loan just as costly as credit cards and other financing options.
• Additional debt. Consider your financial situation carefully before taking on any new debt. Before committing to a home improvement personal loan, be sure that you will be able to keep up with your monthly payments.

Is a home improvement personal loan right for you?

Is a home improvement loan the best choice for your home project? Home improvement personal loans are generally best for homeowners with high credit scores who are looking to complete a small or medium-sized renovation project. If you’re planning a large-scale remodel or if you have low credit scores, you may want to consider alternate sources of funding.

If you’re preparing to apply for a personal loan, make sure to request your credit scores and copies of your credit reports in advance. You’ll typically need good, very good or excellent credit scores for approval.

You can create a myEquifax account to get free Equifax^® credit reports.

If you’ve confirmed that your credit scores are in good shape, you can then confidently apply for a personal loan with a bank or other financial institution. If you have an existing relationship with a lender, consider starting there, as you may benefit from the trust you’ve already established.

For many homeowners, a personal loan can be the key to a much-needed remodel or other home improvement project. Just remember to practice responsible credit behaviors during the repayment period. That way, you’ll be able to pay off your loan and enjoy your improved home debt-free.