Is Taking Out A Personal Loan For Home Improvement A Good Idea?
Owning a house doesn’t mean you automatically end up with the home of your dreams. You’ll likely need to put money, time, and effort into making it what you’ve always envisioned. However, many are unsure whether or not you should use a personal loan for home improvement.
On the one hand, using a personal loan to make these renovations can be a sound investment and even help raise the value of your property. On the other hand, taking out this lending product comes with associated risks and debt.
Keep reading to learn more about the advantages and disadvantages of using this financing option for a renovation project.
How To Use Personal Loans For Home Improvement
When deciding how to use a personal loan for upgrades in your house, think carefully about the task at hand. Will the project add significant value to your property? For instance, a swimming pool, a redesigned bathroom, or a renovated kitchen are all solid investments. A personalized tiki bar, however, may not be.
Consider how you’ll use the loan and the cost you’ll need to cover materials, construction, and any unforeseen expenses. If the monthly payment is something you can budget for and manage well, then this lending product might be a great opportunity to make those desired improvements.
Benefits Of Using Personal Loans
There are numerous advantages to these loans. Here are a few:
- Urgent repairs can be fixed and taken care of before they cause even more damage or become more of a liability
- If you decide to sell your property, then the upgrades you make in your house can essentially pay for themselves
- You’re free from equity constraints
- This lending product tends to be easier to apply for. Moreover, you’re more likely to receive funds when compared with other options like HELOC
- These loans are repaid after one to five years, so you get the cash you need without entering a long and arduous process of repayment
Drawbacks Of Using Personal Loans For Home Improvement
Of course, with the good also comes the bad. Before opting for a personal loan to improve your home, consider these disadvantages:
- This financing option potentially has higher interest rates than other loan options. This can increase the cost of your debt over time significantly
- If you’re late with monthly payments or don’t make the payments at all, you might cause detrimental damage to your credit score
- Not every home improvement project is completed. For example, borrowers can run out of money or a contractor could walk out on the job. In either case, this isn’t an ideal situation to be in and it could defeat your purpose for taking out a lending product in the first place
- Even the best planner can run into unexpected problems when renovating a property. Therefore, your project could end up costing you more than you originally expected. This leaves you in a difficult position to repay your debt
- Not every project will add to the value of your house, so you may not see a return on the investment
Other Alternatives To Consider
If your desire to complete a home improvement project is substantial, consider all of your options and not just a personal loan. It could be that another source of financial funding is a better fit for your specific situation.
Most home improvement ventures are relatively short term, making them good candidates for credit cards. If your project can realistically be completed within 18 months and you have the ability to qualify for a card with 0% APR, then there’s potential for you to finance your project interest-free.
You’ll need to pay the balance in full before the APR introductory offer wears off, but this is a relatively comparable timeline to many personal loan repayment schedules.
HELOC Or Home Equity Loans
Consider how expansive your project is. Will you be adding another few rooms to your property? Do you need new pipes? If your project is significant, a home equity loan might be a good option.
A HELOC can give you access to the funds you need, but you’ll need a good amount of equity in your house after the loan processes.
Title I Loans
One program offered by the U.S. Department of Housing and Urban Development insures private lenders against losses on any property improvement loans. With this program, borrowers can take a maximum of $25,000 over a term of 20 years for one single-family home.
The greatest benefits here are that you don’t need to have equity in your house in order to qualify and the interest rates are usually fixed.
Making improvements to your house is an exciting journey. After all, what better investment is there than to improve the space you live in? Keep in mind that personal loans, though they tend to have easy approval and quick dispersal, come with their own set of risks.
Do your homework carefully and explore all financial options when considering improvements on your property.