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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?
- Is using a personal loan to pay for home improvements a good idea?
- Pros and cons of home improvement loans
- How to choose a home improvement loan lender
- Alternative ways to pay for home improvements
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.