How to Use a Personal Loan for Home Improvements

Interior or exterior. Upgrade or overhaul. Necessity or nice-to-have. Residential renovations and repairs come in a variety of shapes and sizes. Not to mention budgets.

If you're looking to square your house enhancement dreams with economic realities, a personal loan for home improvements can be an effective tool for aligning the two.

What is a Personal Loan for Home Improvements?

A personal loan for home improvements is an unsecured loan used to pay for hard and soft costs related to house renovations, upgrades, and repairs. Repayment periods are typically from one to 10 years, and loan limits generally range from $1,000 to $100,000.

Some lenders market certain products specifically as home improvement loans. Others allow you to designate home improvements as the intended use of, or purpose for, the loan on your application. Either way, the goal is the same: to provide the resources you need to add value to your home or simply make it a better place to live.

How Do Personal Loans for Home Improvements Work?

Since home improvement loans are personal loans by a different name, they work essentially the same.

You qualify based on your creditworthiness and your promise to pay back the debt, plus interest charges and applicable fees. Interest rates are usually fixed.

When you're approved for a personal loan for home improvements, the lender will deposit a lump sum into your bank account. You're then free to use the funds as you see fit.

Keep in mind that the loan repayment term officially begins once the money goes into your account. So, from that moment forward, you'll start and continue making set monthly payments as outlined in the loan agreement until the debt is settled.

Should I Use a Personal Loan for Home Improvements?

When it comes to paying for home improvements, the most popular options are:

• Personal savings
• Credit cards
• Personal loans
• Home equity loans (HEL)
• Home equity lines of credit (HELOC)

If you're able to pay for home improvements without raiding your emergency fund or depleting your regular savings, cash is the way to go. For everything else, borrowing may be your best option.

That said, not all debt is created equal.

Credit cards enable you to purchase renovation-related products and services quickly and easily, but higher interest rates make them an expensive choice. Plus, depending on your credit limit, you may not be able to pay for your entire project with plastic.

Home equity loans and HELOCs usually allow you to borrow the largest amounts of money at the lowest interest rates — if you have enough equity built up in your home. However, since these types of loans are secured, it takes longer to be approved and receive the funds.

Personal loans for home improvements fall somewhere in the middle. They offer the convenience of credit with less interest and the versatility of equity without the wait.

Here are some instances when a personal loan for home improvements makes the most sense:

• If you're making upgrades rather than full remodels or if you anticipate the overall cost of your project will be on the smaller side.
• When you don't have enough equity in your home to qualify for a HEL or HELOC or to offset the higher upfront costs often associated with these types of loans.
• When you lack the time or patience to go through the process of applying for and obtaining a secured loan.
• When you have a high credit score and don't need or want to put up your house or other collateral to secure a loan.

What Are the Pros and Cons of a Personal Loan for Home Improvements?

The biggest benefit of a personal loan for home improvements is the ability to finance renovations or repairs that you might not otherwise be able to afford. However, that enhanced purchasing power comes with some trade-offs.

Here are a few things to consider when determining if a home improvement personal loan is right for you:  

• Size and scope of the project. Extensive renovations, repairs, or upgrades may require more money than you can borrow with a personal loan.
• Equity in your home. You don't need equity in your house to qualify for a personal loan like you do with a HELOC or home equity loan.
• Creditworthiness. Since personal loans for home improvements aren't secured with collateral, you'll need a higher credit score to qualify.
• Interest rates. Personal loans for home improvements typically have lower interest rates than credit cards, but higher rates than secured loans.
• Tax implications. Unlike secured loans, interest charges on unsecured loans for home improvements aren't tax deductible.
• Timing. If you need money for repairs or renovations quickly, a personal loan for home improvements is the fastest route, aside from credit cards.

How Do I Get a Personal Loan for Home Improvements?

Taking out a home improvement personal loan is a lot like applying for any other personal loan. That means a little research and legwork on the front end can lead to substantial savings in the long run.

Fortunately, you have plenty of options. Personal loans for home improvements are available from credit unions, banks, and online lenders, so you should be able to find a product that meets your needs and budget.

Should I Get a Personal Loan for Home Improvements from a Credit Union?

If you're a member of credit union, that's the first — and arguably best — place to begin your search for a home improvement personal loan. The reasons include:

• Lower interest rates. The average APR for a three-year loan from a federal credit union is 8.86%, compared to 9.9% at traditional banks.
• Fewer fees. Personal loan fees vary by lender, but you'll typically pay less (number of fees and amount per fee) when you borrow from a credit union.
• More flexibility. Credit unions are often more willing than traditional lenders to work with borrowers who have struggled with credit in the past.  
• Better service. Since most credit unions have fewer customers than traditional banks, you'll typically receive more personalized service.

Even if you aren't a member, you should research loan options at several credit unions. Then, if you're eligible to enroll, weigh the pros and cons of joining. You'll likely find the potential savings for loans and access to an array of other financial products more than offset membership.

How Can I Get a Good Rate on a Personal Loan for Home Improvements?

When applying for a home improvement personal loan, there's no way to ensure you'll receive the lowest rate possible. You can, however, find one best suited for you.

• Shop around. Research traditional and online lenders to find options that meet your budget and needs.
• Get prequalified. Knowing if you're likely to be approved for a loan will help you more effectively compare rates and terms.
• Secure a cosigner. A cosigner can help you land a loan with an interest rate that you may not qualify for on your own.
• Boost your credit score. A higher score will help you get a better rate, so if your credit is subpar, work to raise it.  
• Reduce your debt-to-income ratio. Strive to maintain a DTI (monthly debt ÷ gross monthly income) of 30% or less.

Finally, remember to consider the overall cost of the loan when researching rates. Although a longer term will lower your monthly payments and may seem like a better deal, you'll pay more in interest over the long term if you extend the repayment period.

What Are Some Alternatives to a Personal Loan for Home Improvements?

As attractive as home improvement personal loans may be, you have other financing options when renovating your kitchen, adding a bath, or taking on other projects around the house.

Home Equity Loans

A home equity loan, or second mortgage, allows you to borrow a lump sum of money against the equity you have in your house and pay it off in regular installments.

Home Equity Lines of Credit (HELOC)

With a HELOC, you can draw money from a line of credit, as needed, over a specified length of time (commonly 10 years) rather than in a single disbursement and only pay interest on the amount you use.

Cash-Out Refinance

Tapping the equity in your house, you can refinance your mortgage with a larger balance and use the money left after paying off your existing mortgage to fund your home improvements.

Credit Cards

Credit cards are less ideal for larger home improvement projects, but they can be viable options if you qualify for a card that has a 0% APR for 18 months or more.

Unsecured Personal Line of Credit

An unsecured personal line of credit functions much like a HELOC with one major difference: it doesn't require collateral.

FHA Title 1 Loan

Issued by financial institutions and insured by the Federal Housing Administration, Title 1 loans allow you to borrow up to $25,000 to improve the livability or energy efficiency of your home, provided the upgrades are a permanent part of the structure and aren't luxury items.

Breaking it Down

Personal loans for home improvements can help to close gaps between project goals and fiscal priorities — if they're chosen wisely and used sensibly.

The key is to assess your financial situation, compare rates and lenders, and select an option that suits your budget.

That's a blueprint for success with any renovation, upgrade, or repair.