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Why improve your home with a personal loan?
Instead of getting a home equity loan & borrowing money against the value of your house, opt for a no-collateral personal loan. Getting a loan based on your credit worthiness instead of your home's equity means you can use your loan as you see fit.
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Typical Home Improvement Projects include:
Best Home Improvement Loans
As the name suggests, home improvement loans are geared toward improving your home. That might include projects such as adding a patio, redoing a bathroom or overhauling the kitchen. These projects — even something as simple as replacing a garage door or entry door — can ultimately increase the value of your home.
But while it sounds great to spruce up your property, it's important to consider whether you can afford to take out a home improvement loan. Although the APRs (annual percentage rates) for home improvement loans typically are lower than they are for credit cards and other types of borrowing, you’ll still be making monthly loan payments on top of your mortgage. That's in addition to all of your other household expenses.
To make it easier to decide whether a home improvement loan is right for you, we’ve put together this guide, which goes over the APRs for these types of loans, how you qualify and other details.
Personal loans for large home renovations: Earnest, LightStream, SoFi
These lenders, SoFi, Earnest & LightStream, are great for larger renovations because of their high loan amounts - up to $100,000 for SoFi and LightStream and up to $75,000 for Earnest.
*Terms are for unsecured loans and may vary for secured loans.
Personal loans for small home renovations: Prosper, Marcus
- APR range: 6.95-35.99%
- Available loan terms: 36 to 60 months
- Loan amounts: up to $35,000
- Time to fund: One to three business days after approval
- Origination fee: Ranges from 2.4% to 5% of the initial loan amount
- Credit needed: 640+
Looking for a home improvement loan? Compare rates.
Home improvement loans of 2019
Before we dig deeper, let's explain the nuts and bolts of a home improvement loan. Home improvement loans can actually refer to three types of loans: a personal loan, a home equity line of credit (HELOC) or a home equity loan.
To qualify for a personal loan, you don’t need to have equity in your home. This loan is unsecured, meaning that your home equity isn’t take into account and your home isn’t used as collateral.
Meanwhile, the amount you can borrow through a HELOC, or a home equity loan, is based on the home equity you’ve built up.
But HELOCs and home equity loans are not the same. The primary difference is that a HELOC is like a credit card — you can borrow up to the credit limit whenever you need the money, within a certain timeframe. A home equity loan is not like a credit card — you get all of the borrowed money at one time.
Another difference: A home equity loan (as well as a personal loan) comes with a fixed interest rate, but the interest rate for a HELOC fluctuates because you’re borrowing money at various times. APRs for personal loans and home equity loans tend to be higher than they are for HELOCs.
Here’s an example of a home improvement loan: A borrower with average credit who takes out a three-year, $17,000 loan with a 19.79% interest rate a 3% origination fee would receive $16,490 in proceeds ($17,000 minus the $510 origination fee), according to PrimeRates’ loan calculator, and would make 36 monthly payments of $629.96. This equates to an APR of 22.02% and total loan payments of $22,678.68.
Can you finance your home improvement project with a personal loan?
The short answer to this question is yes. But why would you take out a personal loan for home improvement projects rather than a HELOC or home equity loan?
Perhaps the biggest benefit of a personal loan for home improvements is that you don’t need to have any home equity at all to qualify. That something that HELOCs and home equity loans do require. (To figure how much home equity you’ve got, subtract the amount you owe on your mortgage from the appraised value of your home.)
Another advantage is that since a personal loan for home improvements isn’t based on home equity, your home isn’t used as collateral — this is known as an unsecured loan. With a HELOC and a home equity loan, your home is used as collateral — these are called secured loans.
Reasons for a home improvement loan
Whether it’s in the form of a personal loan, HELOC or home equity loan, there are several reasons to get a home improvement loan.
One of the major reasons is that for most Americans, a home is the biggest investment they’ll ever make. With a home improvement loan, you can undertake a project that can boost the value of your investment. This is especially true if home improvements, such as a kitchen upgrade or a bathroom makeover, are done before you put your home up for sale.
Another reason to take out a home improvement loan is that it’s usually less costly than putting all of your home improvement expenses on a higher-interest credit card. All of the extra interest you’d pay on your credit card would reduce the extra value you’d gain from a home improvement project.
Home equity lines of credit (HELOCs) and home equity loans
A HELOC acts like a credit card. You qualify for a certain amount of credit, and then borrow against that line of credit when you need it. For instance, you might be approved for a $15,000 line of credit but need only $5,000 right now. Later on, you typically can tap into the remainder of the line of credit. Since you’re borrowing different amounts of money over time, the APR will fluctuate based on when you draw money.
With a home equity loan, you borrow money in one lump sum and repay it with one fixed APR.
Normally, you can withdraw money from a HELOC over a five- to 10-year period and repay the borrowed money over a 20-year period. The repayment period for a home equity loan can last five to 30 years.
When to consider a HELOC or home equity loan
To summarize, consider a HELOC or home equity loan if:
- You’ve got equity in your home (meaning the appraised value is higher than the amount you owe on your mortgage).
- You’re OK with putting up your home as collateral.
- You’d like to enjoy the tax-deduction benefits (which you won’t get from a personal loan).
- You’d like to be able to borrow money as you need it (which you can do with a HELOC).
- You’re looking for an APR range that’s typically lower than the range for a personal loan.
- You want to take more time to pay off the loan.
Finding the best home improvement loan
Before you shop for a home improvement loan, consider how long you’ll be staying there. If you’re planning on moving in a year, it might not make financial sense to get a home improvement loan. But if you’re going to be there longer — five years, for example — you’re more likely to see the financial payoff .
No matter whether you’re seeking a personal loan, HELOC or home equity loan to pay for home improvements, carefully consider whether you can afford the extra financial burden. Will another monthly payment stretch your budget too thin?
If you’re satisfied that your budget can handle another loan payment, then you need to look at which loan option is best for you. Always be sure to weigh the APR, fees, loan amount and loan repayment period before signing a loan agreement. And if you choose a HELOC or home equity loan, make sure you’re comfortable with your home serving as collateral for the loan.