What is a Home Improvement Personal Loan?
Making major improvements to the safety and comfort of your home can set you back a significant sum. Choosing the right project and home improvement loan can help you to quickly, easily and more affordably extend the life of your home, improve resale value, and boost curb appeal.
Home improvement loans can help you finance:
- Room additions, bathroom and kitchen remodels
- New sunrooms, decks, patios, and porches
- New exteriors (shingles, siding, painting)
- Swimming pools, spas and landscaping
- Home repairs (roofing, gutters, plumbing)
- Energy-efficient upgrades (solar panels, HVAC, replacement windows, doors and weatherproofing)
Depending on your circumstances, a home improvement personal loan may offer several advantages over tapping home equity, using a credit card, or raiding your emergency savings.
Is a home improvement personal loan a good idea?
If you don’t have much equity in your home or want to avoid adding more high interest credit card debt, an unsecured personal loan for home improvement can be a smart choice idea. Depending on your credit rating and the interest rate you can obtain, a personal loan can offer a monthly payment that works within your budget. Current average APRs for personal loans range from 10% to 28%. And repayment terms generally vary from one up to seven years in length. While some banks and credit unions offer competitive rates and terms on personal loans, often you can find some of the best deals through online lending marketplaces.
It starts with a simple online application. Just indicate how much you want to borrow and what the money is for. If you qualify, you may receive multiple offers in just a few minutes. In many cases, adding a coborrower can help you qualify for a better rate or, possibly, a higher loan amount. For larger, more expensive projects (like adding a granny unit above the garage or new kitchen appliances), applying with a coborrower can work in your favor.
Personal loans typically come with fixed interest rates, fixed terms—and fixed monthly payments that never change. Knowing what your payment will be makes it much simpler to budget around your other monthly expenses. Unlike credit cards, you’ll know the exact date your personal loan will be paid in full. And compared to home equity loans (which require your home as collateral), an unsecured personal loan is based solely on your (or your coborrower’s) creditworthiness.
Once you select a loan offer for your home improvement needs, you may be asked to confirm your identity, income or employment. Once approved, the money is usually transferred directly into your bank account.
What type of loan is best for home improvements?
Before making a decision about home improvement financing, here are some options you might also want to take into consideration:
Home equity loan or line of credit
If you’ve been seeing rising real estate values in your neighborhood, you may have accumulated a substantial amount of home equity. Home equity is the difference between the appraised value of your home and your current total mortgage balance. Using your home as collateral, you could borrow up to 75-90% of the equity available, depending on the type of home equity loan or line of credit you’re applying for, your credit and income, and the lender.
Home equity loans and lines of credit generally come with lower interest rates than unsecured personal loans. However, the difference in rates could be offset by any closing costs you’ll incur (similar to what you paid when you took out your first mortgage). Closing costs can include an application fee, home appraisal, notary fee, title search, attorney’s fees, and additional fees, such as points to buy down the interest rate. It pays to shop around and carefully compare costs for different types of loans. Keep in mind that just like your original mortgage application, home equity loans and lines of credit require extensive underwriting documentation, and can take 30 days or longer to complete.
On the upside, if you can show you’re using the money to improve your home, you may be able to write off home equity loan interest on your tax return. Depending on your creditworthiness, you may be able to get a lower rate on a home equity loan than on an unsecured personal loan. But keep in mind most home equity lines of credit have variable interest rates, which means your monthly payment may fluctuate. Also, since your home serves as collateral for the loan, if you stop making payments, the bank can repossess your home to make good on your debt.
In the case of a home emergency, such as a broken water heater, leaky roof, or mold, credit cards are good in a pinch. When you use an existing credit card, there’s no application and no wait time. And if the amount you need is small (under $1,000), and you expect to pay it off in a couple of months, using a credit card can be more convenient than applying for a loan.
But most credit cards come with high, variable interest rates. So if you’re in the habit of only paying the minimum amount each month, the effect of compounding interest can add up quickly. Ultimately, this will increase your total amount owed and extend the time it will take you to pay back the loan for decades. Putting expensive home improvement and repair costs on a credit card is not the best choice if you know it will take you several months or years to pay those in full.
> Pro Tip: If you’re struggling with overwhelming credit card debt, consider using a balance transfer personal loan to pay down your cards directly.
If your home remodeling project doesn’t need to start right away, and you want to avoid taking on new debt, saving up the cash ahead of time is a great way to go. It’s as easy as setting up a special savings account and funding it monthly. By not taking on new debt, you’ll conserve your available credit, and keep your debt-to-income ratio in check. Plus you won’t have to worry about interest payments, or loan closing fees adding to your overall costs.
The only drawback to paying in cash is that it will take some patience to save up the money. (At any point it may be tempting to drain your emergency savings account. So be sure to put some spending rules in place.) If you choose to go the cash route, research how much your project will cost upfront and start saving well ahead of time. For instance, let’s say you’ve estimated $15,000 for a new roof and gutters and can afford to set aside $400 per month. It will take about 36 months (three years) before you will need to schedule a contractor.
Explore your home improvement loan options
When it comes to finding the best home improvement loan, shop around, do your research, and explore all your options. When you borrow responsibly—only taking on a loan you can afford to repay, and making all your payments on time—a personal loan can not only help you affordably finance major home repairs and improvements, but other big-ticket items. Weddings, moving expenses, funeral costs, medical bills, and consolidating credit card debt are other reasons to consider a personal loan.
If a personal loan sounds like it might be a good fit for you, check your rate through LendingClub—with no impact to your credit score.1 Personal loans are available through LendingClub for as low as $1,000 all the way up to $40,000—and you could be approved in 24 hours and have the money in your bank account in as few as four days.2,3
1Checking your rate through LendingClub generates a soft credit inquiry, which is visible only to you. A hard credit inquiry that may affect your credit score only appears when your loan is issued.
2Of all personal loans approved through LendingClub between 1/1/19 – 3/31/19, 72 percent were approved within 24 hours.
3Based on a majority of borrowers who were issued loans through LendingClub between 1/1/18 and 12/31/18. The time it takes for loans to be funded may vary.