Personal Loans for Home Improvements

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Looking into home renovation projects?

Perhaps your kitchen is outdated and you’d like to remodel the countertops and cabinets to look more modern. Or maybe your bathroom feels like it’s from the 1960s and you’d like to revamp it to have a simpler, more contemporary vibe. There’s just one problem: You don’t have the savings to make your home improvement project a reality.

Don’t worry just yet. There are myriad ways to finance a home improvement project. One common way many people finance their home repairs and remodeling projects is by taking out a home improvement loan. A home improvement loan is a personal loan taken out by homeowners to make home improvements or repairs.

Should you use a personal loan for a home improvement project?

Personal loans come with a series of pros and cons. They can allow you to pursue the renovation project of your dreams. But they can also come with high interest rates and other potential drawbacks.

One thing to keep in mind is your intention with this home improvement project. If you’re trying to increase the value of your home, for example, you need to look at whether the amount you will be spending will give you a return on your investment.

“I think one of the things people assume sometimes is, ‘Hey, any improvement I do to my house is going to automatically increase the value of my house,’” said Kathy Conley, a stakeholder engagement specialist with GreenPath Financial Wellness. “That’s not always true.”

Catalina Franco-Cicero, a certified financial planner with Tobias Financial Advisors in Plantation, Fla., recommends people take a look at the pros and cons of taking out a personal loan for home improvements, and what they might be giving up in the process. “Is this home improvement at the expense of you saving toward retirement, or even having an emergency fund?” she said.

But for many people, taking out a loan for a home improvement project can be a great decision. Below, you’ll find some of the common pros and cons associated with taking out a personal loan for home improvements.

Pros and cons of using a personal loan for a home improvement project

It is important to understand the pros and cons of using a personal loan for a home improvement project before starting the process. This will help you to better understand if a personal loan is right for you!

  • You’ll finally be able to tackle your long-awaited project. Home improvement loans can give you the freedom to take on a project you’ve wanted to address for years. If you can secure a fairly low interest rate, this will make the process even better.
  • Nothing will be used as collateral. Certain loans require that the loan is backed by collateral. For example, a home equity loan is a form of a secured loan since it requires a person’s home be used as collateral. Personal loans are unsecured loans, meaning nothing is used as collateral.
  • Budgeting will be easier. One upside to personal loans for home improvement projects, according to Franco-Cicero, is that they come with a solid amortization schedule, which means you’ll have a consistent fixed monthly payment that will end at a certain time. This predictability can be beneficial to consumers on a tight budget.
  • Personal loans typically come with high interest rates. One major downside to using a personal loan for a home improvement project is that personal loans can come with high interest rates. According to data from August 2018, the average interest rate on personal loans for people with excellent credit (meaning a credit score of 760 and higher) was 9.09%. But this number jumps significantly with a drop in one’s credit score: The average rate for people with good credit (meaning a score between 680 and 719) was 17.73%.
  • Your return on investment might not be worthwhile. Because of the often high interest rates associated with personal loans, the return on investment for a home improvement project might not be worth it.
  • There might be better financing options available. Depending on the equity you have in your home, a home equity loan or home equity line of credit (HELOC) might be a better option for you.

How to get a home improvement loan

If you've decided a home improvement loan is right for you, follow these steps to get started.

  1. Check your credit score. The first thing you should do is check your credit score since personal loan rates are based on a consumer's credit score. If your rate isn't high, Franco-Cicero recommends taking a few months, if possible, to increase your score. “Can you try to improve your credit score in the next couple months?" she asked. “Do a little bit of self-assessment so that you can get the best rate possible.”
  2. Shop around with different lenders. This step is crucial. You'd shop around for nearly anything else you'd buy — even something as small as new winter boots. So why wouldn't you shop around for the interest rate on a loan that could potentially be tens of thousands of dollars? “[Personal loans] could have higher interest rates than, say, something that has collateral, like a home equity line of credit or a home equity loan,” Conley said. “So you want to shop around. If you're borrowing money, you always want to shop around regardless of what it is.” Conley recommends starting with the financial institution with which you bank. “Talk with your finance agency to begin with — your bank or credit union, whoever that might be,” she said. “Start there and see what they can offer you. They know you to some degree. You have your accounts there. Maybe they would be able to do [a personal loan] for you at a decent amount, at a price that you could afford.”  
  3. Compare rates and look at your budget. Get in touch with lenders that offer rate quotes using soft credit checks. Then, compare the rates you've been offered. After you've selected the best option, take a hard look at your budget and make sure the monthly payment would work for you. “Make sure that the payment that you're going to be making fits within your budget,” Conley said. “Don't just guess. Sit down and work it out. Talk with a counselor if you want to.”
  4. Apply for the loan. Once you’ve done your due diligence and found the personal loan that's best for you, it’s time to apply. You often can apply in person or online, depending on the institution. Your credit will be checked, and you'll need to submit both proof of employment and income.

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3 other ways to fund a home improvement project

A HELOC is a revolving line of credit you take out with your home as collateral. The amount you can borrow depends on how much equity you have in your home, and the borrowing structure is similar to that of a credit card.

  • You draw only what you need when you need itThis flexibility can be good for long-term projects with high budgets, such as a total kitchen remodel. If you’ve got a major project going, say for example a kitchen remodel that’s going to cost $40,000, you don’t need to provide the $40,000 all at once to whatever contractor you’re using. Instead, you can pay for different parts of the project at different times. That way, you’re not paying interest on everything right away.
  • Lower interest rateHELOCs typically come with lower interest rates than personal loans.
  • Tax deductionsWhen a HELOC is used for home improvements, consumers can possibly deduct the interest on their annual taxes.
  • Your home is used as collateralBecause this is a secured loan with your home as collateral, the stakes are higher. If something goes wrong and you cannot repay your loan, for example, you risk foreclosure.
  • Fees might be involvedIf you take out a HELOC, you will most likely have to pay certain costs such as closing costs and appraisal fees.

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A home equity loan is similar to a HELOC, but with a fixed term for the loan. You receive the money in one lump sum at the beginning of the term and repay it over a set number of months.

  • Lower interest rateLike a HELOC, a home equity loan typically has a lower interest rate than a personal loan.
  • Tax deductionsWhen a home equity loan is used for home improvements, consumers can possibly deduct the interest from their annual taxes.
  • Fixed interest rateAlthough HELOCs can come with variable interest rates, home equity loans typically have fixed interest rates. This can give consumers peace of mind as rates cannot suddenly increase.
  • Your home is on the lineSimilarly to a HELOC, taking out a home equity loan means your home is on the line. If you cannot repay the loan, you risk losing the roof over your head.
  • Typically, fees are involvedIf you take out a home equity loan, you will most likely have to pay certain costs such as closing costs and appraisal fees.

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Franco-Cicero said one other way someone could finance a home improvement project would be through a 0% introductory APR credit card. She emphasized that this is only a good option for people with excellent financial discipline.

Franco-Cicero advises people to take this route only if the home improvement project is something they could do in one or two months — well before the introductory 0% rate ends.

  • There’s nothing on the lineUnlike a home equity loan or HELOC, in which your home is on the line, nothing would be used as collateral, as a credit card is a form of unsecured debt.
  • You don’t have to pay interestAssuming you pay off the card within the introductory rate period, you won’t be paying anything in interest on the loan.
  • It’s riskyIf you don’t pay off the card within the introductory rate time frame, you could be hit with very high interest rates after.
  • It might not be enough moneyIf you’re looking to take on a project with a high budget, this route might not offer as much financing as you need.

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