Land Loans: Using a Personal Loan to Buy Land

If you need funding to buy a plot of land, you can potentially use a personal loan. However, it might not be your first choice when compared to land loans and construction loans, which typically carry lower interest rates.

Using a personal loan to buy land does come with benefits, though. Personal loans don’t require collateral, so you don’t risk losing an asset if you default on the loan (although you do risk ruining your credit). Plus, personal loans carry less restrictions than land loans and mortgages.

Using a personal loan to buy land

Personal loans are generally unsecured, meaning they don’t require collateral. They are a flexible form of financing, as they can be used for a variety of reasons, such as debt consolidation and home improvement financing — even a land purchase.

Since these loans for land don’t require collateral, lenders rely more heavily on your credit score to determine your eligibility as a borrower. Lenders typically look for the following when analyzing potential personal loan candidates:

• Good credit score
• Steady income
• Low debt-to-income (DTI) ratio

Community banks, credit unions and larger banks may be more inclined to consider personal loan borrowers who, along with having strong credit and income, are existing customers with well-managed savings accounts or other loans (such as a traditional mortgage) with their institution. Online lenders offer personal loans to those who qualify based on creditworthiness and other factors specific to the borrower’s financial profile.

How your credit score affects personal loan affordability and eligibility

Personal loans tend to come with higher APRs (annual percentage rates), which makes them less affordable, particularly for low-credit borrowers. Because there are no assets to be seized if the borrower defaults on the loan, personal loan eligibility will also vary depending on the borrower’s creditworthiness.

Borrowers with a strong credit profile will generally see lower offered APRs (which includes interest and other fees) than consumers with lower credit scores. See just how much APRs vary for people in different credit bands, according to the LendingTree Personal Loan Offers Report:

To get your best deal on a personal loan when buying land, it’s important to shop around and compare interest rates. The lower your APR is, the less you’ll pay over the life of the loan. LendingTree lets you compare offers from up to five lenders — depending on your creditworthiness — so you can get your best terms on a personal loan.

Personal loans vs. land loans

A personal loan is an unsecured loan that can be used to finance many different ventures, while a land loan is specifically issued to finance a land purchase. While you may be familiar with the basics of securing a mortgage to buy a home, it doesn’t work the same way if you aren’t purchasing a lot with a home already built on it.

Getting a land loan can be a lot more complicated — and expensive — than getting a traditional mortgage. These loans are often considered risky, in part because land is a more illiquid asset. It can be difficult to sell, particularly if it is raw (undeveloped) versus improved (developed, with access to infrastructure including roads and water supply lines).

Big banks, community banks and credit unions may be strict when it comes to making land loans, especially for raw land, and not all will offer such financing. Personal loans are offered based on creditworthiness, which means they can be used to pay for many different things. However, you should consider that personal loans typically have a cap at $50,000, and how much you’re approved to borrow will also depend on your credit score.

Should I choose a personal loan for land?

Financing land with a personal loan may be cheaper

Traditional land loans often involve higher fees, such as appraisal, processing, underwriting and title insurance. If you’re looking for a relatively inexpensive loan for a smaller plot of land — say, $20,000 — a personal loan may be more beneficial than a land loan as it wouldn’t make much sense to spend thousands in fees for a loan of that amount.

Many personal loans carry no fees at all, which would make them advantageous in this situation, particularly if you have excellent credit and can qualify for the lowest possible APRs offered by personal loan lenders.

Personal loans may offer shorter terms than land loans

Personal loans tend to have shorter terms, typically 12 to 60 months, than some other loans. A land loan also generally has a shorter term than a traditional mortgage, although some can offer longer terms than the average personal loan.

Borrowers who are looking for a longer-term, potentially lower-interest loan for a more expensive plot of land are not as likely to get a personal loan to finance this expense.

Alternatives to land loans and personal loans to buy land

USDA loans

Borrowers may want to look into U.S. Department of Agriculture (USDA) Section 523 and 524 loans for plots of land meant to build housing sites in rural areas. These types of USDA loans are short-term loans (two years) that can come with favorable interest rates: 3% for Section 523 loans and below market rate for Section 524 loans.

The 523 loan is considered only for self-help housing, which means the borrowers will provide their own labor for which to construct a home. The 524 loan is for lower- to moderate-income borrowers, and there are no limits on method of construction.

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

If you have equity in your home, you could consider getting a home equity loan or home equity line of credit — also known as second mortgages — to potentially secure a lower interest rate than you would get with a personal loan for purchasing land.

Home equity loans, which are funded in a lump sum, typically have longer terms than the average personal loan, about five to 15 years. HELOCs, which function like a credit card, often have a draw period of five to 10 years, with a repayment period around 10 to 20 years. However, you would also have to pay closing costs, which are about 2% to 5% of the loan, with either option.

SBA 504 loans

Small business owners who are looking to purchase land for their venture could consider opening an SBA 504 loan. These types of loans can be used for purchasing lots, as well as:

• Purchasing existing buildings
• Constructing new facilities or remodeling old facilities
• Debt refinancing with an aim toward business expansion

The borrower is required to make a 10% down payment, the government puts down 40% of the loan through a certified development company, and a lender finances the other half of the loan. These loans also come in a much higher amount than other types of land loans. Most businesses can qualify for up to $5 million, while certain industries (including small manufacturers and green energy projects) can qualify for up to $5.5 million.

FAQ: Personal loans and land loans

WHAT ARE TYPICAL PERSONAL LOAN INTEREST RATES?

Personal loan APRs are about 10% to 25%, but they can be even higher for subprime borrowers with credit scores below 640. Since personal loans don’t require collateral, lenders rely more heavily on your credit score to determine your eligibility as a borrower. It also means interest rates are typically higher than what you’d find with secured loans. Borrowers with good credit will get the best APRs on personal loans.

WHAT ARE TYPICAL LAND LOAN INTEREST RATES?

The interest rate on a land loan depends on the type of loan you’re seeking. Ten-year lot land loans carry interest rates of 4% to 5%, while raw/recreational land loans are a quarter of a percentage point higher at 4.25% to 5.25%. Average construction loan rates range from almost 6% to almost 10%.

WHERE CAN I FIND BAD-CREDIT PERSONAL LOANS FOR LAND?

It’s difficult to secure a personal loan with favorable terms if you have bad credit. Most lenders require that you have a credit score of at least 600, and even with a credit score in the 600s, you’ll end up paying a higher APR than prime credit borrowers. However, certain lenders do specialize in personal loans for borrowers with bad credit. Search out online lenders, banks and credit unions, but beware of payday loans, which come with extremely high APRs.

WHERE CAN I FIND BAD-CREDIT LAND LOANS?

It will also be difficult to secure a land loan if you have bad credit. Since land loans are riskier than mortgages and other types of loans, lenders will want to see that the borrower has a good credit score before lending any money. Borrowers could consider going to a credit union through which they already have a history of on-time payment to see if they could get a loan to purchase land.