Should I use a personal loan for home improvements?

What is a personal loan for home improvement?

A home improvement loan is a type of personal loan that can give you a lump sum of money within a few days. Some lenders might have a distinct home improvement loan, while other lenders allow personal loans to be used for home expenses.

Getting approved for a home improvement loan is a similar process to getting approved for a personal loan. Your interest rate will be based on your creditworthiness. Lenders look at your credit score, income and debt level to determine your annual percentage rate (APR). Expect to be asked for your Social Security number, employment verification and residence verification.

When should I use a personal loan for home improvements?

There are a few scenarios when using a personal loan for your home renovations may be your best option, especially for small and medium projects. Let’s review some examples.

Emergency repairs

A personal loan works well for repair emergencies where you need the funding quickly, such as plumbing or roofing repairs.

Small and mid-size projects

Personal loans typically can be as large as $50,000. If your project requires more cash to pay for it, you’ll likely want to consider an alternative option. A personal loan is a great way to finance a project like a small bathroom reno or a new deck with a smaller total cost.

Projects with a set price tag

If you know exactly how much your home improvements will cost and that cost will not go up during the construction, a personal loan is a good choice. If the price could vary and increase throughout the lifetime of the project, you may want to consider an alternative option to make sure you have enough financing set aside to cover it.

When is not a good time to use a personal loan for home improvements?

On the other hand, for larger projects that will cost more than $100,000 or ones that will vary in cost, a personal loan is not your best option.

Major renovation projects

A major home renovation project, such as the addition of new bedrooms, bathrooms or a garage, will cost thousands of dollars. As noted above, most personal loans can be as large as $50,000. For pricier projects, consider the alternatives below.

Alternatives to personal loans to pay for home improvements

Rather than getting a loan, you may want to look into other ways to pay for a small project. To finance home improvements that will cost more than $100,000, you'll need to look into other home loan or refinancing options.

Depending on the size of the project and your current financial situation, consider one of these alternatives that may be a better fit than a personal loan for paying for home improvements.

Credit card

For a smaller project, it may make sense to put the cost on a credit card rather than taking out a loan. Before doing so, be aware of your interest rate and how long it will take you to pay it off to make sure it’s a good financial option.

Savings

Similarly, you may want to consider using money from your savings to pay for a small project if you’re able.

Cash-out refinance

For a project like major renovations or additions to a house, a cash-out refinance, home equity loan or home equity line of credit (HELOC) can give you access to larger sums of funding.

A cash-out refinance will add the cost of your project to your current remaining mortgage loan amount. It replaces your existing mortgage with your new, larger mortgage.

Home equity loan

A home equity loan is separate from your existing mortgage and can finance your larger home renovations.

HELOC

A HELOC is a revolving line of credit, acting similarly to a credit card. Once you pay off some of the debt, you have access to the same funds again, making it easier to pay for long-running remodeling projects.

Pros of using a personal loan for home improvements

One benefit of using a personal loan for home improvements is that funds are disbursed quickly. This can be especially helpful if emergency repairs must be completed, like for roof damage or pipe issues. Whether you need the funds for weekend repairs or long-dreamed-of remodeling, there are many benefits of using a personal loan.

Cons of using a personal loan for home improvements

While personal loans come with a lower risk than taking out a loan against your home, there are some disadvantages to consider.

Where can I get a personal loan for home improvements?

There are various options for lenders for home improvements — each with its own perks and drawbacks. You can ask the lender if it offers a specialized loan for home improvements -- possibly one with lower rates or longer repayment terms than the standard personal loan.

Banks

Bank loans might be easier to qualify for if you are a current customer. It can also be convenient to apply in person if you are using a local bank. Online banks typically offer low interest rates and favorable terms.

Credit unions

Credit unions offer competitive borrowing rates for members, as well as financing for smaller projects.

Online lenders

Online lenders can provide quick and easy access to financing for home improvement projects. Some online lenders have more relaxed lending requirements and faster approval times than banks or credit unions, but interest rates can also be higher.

Bottom line

Keeping your home current with home remodeling is a great way to protect your investment. A personal loan is one way to finance your project, but alternatives, such as a HELOC or cash-out refinance, can give you access to a higher amount of cash than a personal loan can.