Jan 31, 2020
By Mariclare Cranston, Content Specialist

Using a Personal Loan for Home Improvements

Home improvements can take many different forms, from major projects like building an addition to smaller ones like a few new appliances. Many times, people turn to home equity products like home equity loans or home equity lines of credit to finance their home projects. This is usually a smart financial move as home equity products typically carry a lower interest rate since they are secured by the value of your home.


What type of loan is best for home improvements?

You may have smaller projects, though, for which you don’t want to tap into your home’s equity. For example, if the only project you want to tackle is refacing your kitchen cabinets, you might be hesitant to go through the appraisal process necessary to obtain a home equity loan. Your first instinct may be to use your credit card, but unless you can pay that card off quickly, you’re adding a lot of expense to your project in the form of higher interest rates. Using a credit card also means you may take longer to pay the project costs off since there is no definitive payoff date on a credit card.
 

Compare Rates
A Personal Loan will very often carry a lower interest rate than a credit card. Before you pull out your card to fund your smaller home projects, shop personal loan rates. You may end up saving yourself hundreds of dollars in interest.


Is a personal loan better than a home equity loan or a credit card for home improvements?

Using a Personal Loan to fund smaller home improvement projects may be a better option than a home equity loan because you avoid using your home’s equity for something that can be paid with other means. In other words, a very large expense like an addition or a complete kitchen remodel will likely require you to consider a home equity loan, so if you can use a personal loan to pay for smaller projects you protect your equity for any future needs. In addition, applying for a home equity loan is a more complex process than applying for a personal loan, and may involve additional costs like a home appraisal. Funding your home improvement projects with a personal loan requires a quick, easy and online application.

Personal loans are also more attractive than credit cards for home improvement projects. Putting a large charge on your credit card will add up over time thanks to higher interest rates. The example* below shows that using a credit card means you could end up paying almost double the amount of interest.
 

  Personal Loan Credit Card
Amount $6,000 $6,000
Interest Rate 8% 18%
Term 48 months 48 months
Monthly Payment $146 $176
Total Interest Paid $1,031 $2,460

*All calculations based on bankrate.com payoff calculator

Furthermore, many credit cards carry a variable interest rate. On the other hand, personal loans have fixed interest rates. This ensures that your monthly payment will be the same each month, provided you don’t accrue any late fees. Knowing exactly how much your monthly payment will be allows you to adjust your budget and determine the affordability of your personal loan. Personal loans also carry flexible terms, allowing you to select a term that best works with your financial picture. The available terms will depend on your financial institution. At MHV, personal loans carry terms up to 60 months, giving you the freedom to find a payment that will work with your budget. Keep in mind that with a personal loan you’ll receive all of the funds upfront, so you may want to set up a separate savings account to keep that money separate and earmarked solely for your projects.

 

How much can I borrow for home improvements?

The maximum amount you can borrow with a home improvement loan depends on the guidelines at your financial institution. At MHV, you can apply for up to $25,000 with a Personal Loan, enough to fund several smaller projects or even a bigger remodel. The chart below gives the national average cost of some common home improvement projects.

Project National Average Cost*
Install counters $2,927
Reface cabinets $6,897
Install new roof $7,865
Remodel bathroom $10,441

*Data as of 1/16/20 and found via HomeAdvisor’s True Cost Guide

It’s important to adjust your budget to be sure you can afford the cost of your home improvement projects. A budget will allow you to see all of your income versus all of your expenses, and allow you to adjust where you may be spending your money. Keep in mind that you don’t want to decrease your savings in order to pay for a Personal Loan. Instead, look for opportunities where you can comfortably cut back on your spending, and determine if your estimated monthly payment will be feasible.


Use our free Budget Tool
to determine how much you can afford.

download our budget sheet

Do I qualify for a home improvement loan?

Lenders will often look, at the very least, at your credit score and your debt-to-income ratio (DTI) before deciding to lend to you. Your credit score is a mathematical analysis of how likely you are to repay your loan on time. Your score factors in things like how many loans or credit cards you have, how well you pay your bills on time, how much of your available credit you’ve used and how old your oldest credit or loan account is. All of these factors are weighted and combined to assign you a score. It is very important to have a good understanding of what your credit score is before you begin the process of applying for a personal loan. If you score isn’t high enough, there are steps you can take to work on improving it.

DTI measures how much debt you currently have relative to your income. A DTI that is too high suggests you may be spread too financially thin to be able to make the payments on your personal loan. Even if you have a good credit score, a high DTI can cause some lenders to deny your application. Using a monthly budget tool is a great way to manage your finances and keep your debt at a manageable level.


For more information on understanding your credit, watch our brief explainer video here. 

How can I save money on home improvements?

There are ways to be sure you’re making the most of your home improvement loan, and saving money on your projects. Taking the time to thoroughly plan and research your home improvement project is the single most important step you can take. Doing so will help you feel more prepared and will ensure the project goes as smoothly as possible. Here are some additional helpful tips.

  1. Build a strict project budget, and stick to it. It will be easy to be tempted by extras and high-end materials. Sticking to your budget will be important to keep you on the right financial path.

  2. Plan for the unexpected. Make sure your project budget includes about 20% of the total cost for unexpected expenses. It’s far better to build these costs in and be prepared for them than to have to find a way to come up with additional funds after your project has started.

  3. Think of timing. Consider doing your renovations during “off seasons” when contractors are less busy. This may save you some money.

  4. Shop around. It’s important to get at least three quotes from reputable, insured contractors. This will help you determine whether you can afford the project and ensure you’re getting a good deal.

  5. Pick your project wisely. Which will add the most value to your home? Which can you afford? Which requires the lowest amount of long-term maintenance costs?

With fixed rates and flexible terms, a personal loan can put the goals you have for your home within reach.


Looking for more guidance on home improvements? Download our free eBook!

Guide to Home Improvements


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