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If you have leaky windows or drafty doors, you might consider taking out a personal loan to fund replacement of these key home features.
However, before you sign on the dotted line, it’s important to understand the pros and cons of using a personal loan for a home renovation project.
Before using a personal loan to pay for replacement windows and doors, make sure you understand your debt situation, says Victor Russell, regional operations manager for Apprisen, a Gahanna, Ohio-based financial counseling and education services organization.
Russell says a high debt-to-income ratio – how much you owe each month compared to how much you earn – makes a personal loan a risky venture.
“As an individual nears the 20% mark, debt payments are beginning to take up too much income,” Russell says.
Also, know your credit score, and look at your credit report to make sure there are no errors. Your credit status will have a large bearing on the terms of the loan, including the interest rate you pay, Russell says.
Here are the pros and cons of using a personal loan for replacement windows and doors:
Using a personal loan for replacement windows and doors offers one key advantage over many other types of loans.
“Usually, (there) is no collateral required,” Russell says. “Only the signature is used to secure the loan.”
So, if you have good credit and do not want to use your home as collateral, a personal loan might be more convenient than other types of loans.
However, such convenience comes at a cost.
“The interest rate for a personal loan will most likely be much higher than a home equity loan or HELOC (home equity line of credit),” Russell says.
That’s because a home equity product is secured by your home. If you default on a home equity product, the lender potentially can seize your house as payment. This makes home equity loans and lines of credit less risky for the lender.
By contrast, there is nothing for the lender to seize if you fail to pay the personal loan. To compensate for that risk, you will be charged a higher interest rate.
Using a personal loan for the right reasons
Also, if you are taking out a personal loan, make sure you are getting replacement doors and windows for the right reason.
In some cases, replacing your doors and windows is necessary. For example, perhaps your doors are falling apart. Maybe your windows are drafty and starting to rot from moisture.
However, if you simply intend to replace these items in hopes of boosting your home’s value, you might end up disappointed, says Todd Christensen, a financial counselor and education manager at Debt Reduction Services in Boise, Idaho.
While some types of home improvement projects increase the value of a home, many others do not. In fact, Christensen says such a boost to the home’s value is “uncommon.”
“Improving a home’s value prior to sale usually involves cosmetic improvements to curb appeal, and to the kitchen,” he says. “Otherwise, the loan needs to be approached by the homeowner as a financially costly project.”
It is easy to get carried away with the idea that all the improvements you make to the home are investments in the home’s value. “They generally are not,” Christensen says.