Home improvements are known to be overwhelming and often very stressful. Starting from the very beginning which is financing. Home renovations, upgrades, and improvements aren’t cheap, and to make a house a home, you need enough money and most of us don’t have the cash just lying around.
The first thought for most of us would be applying for home equity loans to get the funding you need to make improvements on your home. However, before you jump right into applying for an equity loan, let’s talk about personal loans for home improvement.
In some cases, getting a personal loan for certain home renovations is better than going for home equity loans.
Let’s see whether or not you should use a personal loan for your home renovation.
What is a personal loan?
Personal loans are loans financed by a certain financial institution such as a bank, an online lender, or a credit union. These loans are known as home improvement loans as well because they are often used for renovations, updates, repairs, or home add-ons.
Since personal loans and home improvement loans are pretty much the same things, that means that they have fixed interest rates and repayment timelines. You get the money upfront and then you have to repay it in fixed monthly payments over a certain time. Depending on the lander, the repayment terms on personal loans range between one and seven years.
They are also usually unsecured which means that you don’t need collateral to qualify.
Personal loans vs home equity loans
When it comes to deciding which of these loans will better suit your needs and which one to choose, you’ll need to consider several variables, but mostly your financial circumstance.
For example, a personal loan would work best if you need money without a long application process. In case you have excellent credit you may also qualify for a low interest rate. Also, if you don’t have any equity in your home, going straight for the personal loan is the best option.
Home equity loans, on the other hand, require plenty of equity in your home and if you need funds for a big, one-time renovation project. If you fail to qualify for low interest rates on a personal loan, you should choose a home equity loan.
These loans are secured and they use your home as collateral – this is why interest rates are much lower than with personal loans. Additionally, home equity loans do not pay off your existing mortgage but if you choose equity loans you’ll have to pay off both the mortgage and the loan.
Should you use personal loans for home improvements?
Personal loans are a great option if you’re doing small to mid-size home improvements – if you’re going to upgrade a room or change windows on your house. Once again, your financial circumstances will ultimately decide whether or not you should use personal loans for home improvements.
Still, it’s important to know all the pros and cons of personal loans before you apply for them.
Pros of personal loans
Probably the biggest advantage of personal loans is their lack of collateral. If you decide to qualify for personal loans you won’t risk losing your home. Also, personal loans are fairly quick, after applying, the money will be delivered to your bank account in a matter of days.
Another great thing with personal loans is fewer fees. They do come with origination fees, but they lack all of the closing costs that home equity loans have.
Cons of personal loans
When qualifying for personal loans creditworthiness is the greatest factor. In addition to that, since personal loans are unsecured, interest rates are higher.
The repayment terms are significantly shorter than with the rest of the loans and they are also less flexible. Not to mention that there are payment penalties should you fail to make a payment each month. And finally, with personal loans, there are no tax benefits.
Other options
Last year has seen the rise in home office remodels, upgrades, and improvements. If you are looking for a way to fund a home office remodel, apart from personal and equity loans, you can also consider flexible small business loans.
If you run a small business from home, you can easily apply for a business loan with low interest rates. There are different types of business loans that can be a good option for you and your renovation.
Cash-out refinance is another option for small home upgrades. This type of loan is fairly new and it is meant to replace your existing mortgage with a new mortgage. This means that with this loan you would be taking a new mortgage for more than you owe on your house and use the rest to fund your home improvement project.
Credit cards are an amazing option if your improvements aren’t going over $10,000 and you can repay loans relatively quickly.
When planning to make home improvements, it’s good to know that you have various options in terms of funding.
Many people don’t even consider different options, instead, they go for what they know without doing a bit of research. As you can see, depending on the scale of renovation and upgrade, you can apply for different types of loans. A personal or home improvement loan is one of the better options if you are doing a smaller to mid-size reno on your home.
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