Smart Ways to Use Personal Loans for Home Improvement Projects

Personal loans are relatively easy to obtain and offer quick access to cash. But they have higher interest rates than secured loans for home improvements, like home equity loans or HELOCs.

Also, they often have shorter payback periods and can trigger high late fees. Before you take on any project, make sure it’s a need-to-have and can be paid off quickly.

Use Cash Savings

Whether your home improvement project is minor or major, you can save money by not taking out a personal loan. If you have the means, try to finance your renovations with cash or a combination of other financing methods instead. These include asking family and friends, saving from financial windfalls (like tax refunds or monetary gifts), and credit cards with rewards programs.

If you’re not able to save up the funds for your project or the loan terms don’t meet your needs, consider scaling down your plans or completing the project in stages. For example, if you’re renovating your kitchen or adding a bathroom, consider refinishing outdated cabinets rather than replacing them, and paint the walls yourself to save on hiring a professional.

Personal loans work a lot like mortgages, where you qualify based on your creditworthiness and promise to pay back the debt plus interest charges over time. However, you don’t run the risk of losing your home if you don’t repay.

Some personal loans, such as those offered by Rocket Loans, have a faster application process and can be funded in as little as one day once the loan agreement is signed. But borrowers should keep in mind that these loans typically carry higher interest rates than those from banks and could end up costing you more in the long run.

Another alternative is to get a home equity line of credit, or HELOC, which works a bit differently than a personal loan. With HELOCs, you can tap into a portion of the equity you have in your home as needed over the course of 10 years and only make payments on what you borrow. However, Helocs don’t come with a fixed rate and can often have high-interest rates, although you may be able to deduct the interest payments on your taxes.

Many credit unions offer personal loans with a lower interest rate than banks and can be an excellent choice for borrowers looking to save on the costs of borrowing. Additionally, most credit unions offer personalized service and often have a lower minimum deposit amount to open an account.

Use a Credit Card

Home improvement projects can be costly, but they may also boost your home’s resale value and help you qualify for lower mortgage rates in the future. But it’s important to consider all financing options before deciding how to fund your renovation. Using a credit card, for example, is a convenient way to pay for items and services, but it can be expensive when not used responsibly. Other financing options that provide more flexibility, lower rates, and a longer repayment period include home equity loans, HELOC, or cash-out refinancing.

Using a credit card for home improvements can be tempting if you have the right strategy in place. Whether you’re making a one-time purchase or spreading the cost of a lengthier project, you can make use of cards with a 0% interest introductory offer and rewards programs. However, remember that the cards require discipline to avoid paying extra in interest, and you’ll need to budget in repayments alongside other bills.

If you’re planning a major home improvement project, it’s best to save enough cash for it, as this can protect your financial security in case of unforeseen expenses or if your project takes longer than expected. In some cases, it’s possible to negotiate discounts from contractors if you pay in cash.

To find out how much you need to borrow for a specific project, consult a professional contractor and compare estimates from multiple companies. Websites like HomeAdvisor can help you get a ballpark idea of project costs based on typical pricing in your area. You can also ask your lender to give you a personalized rate and term estimate, which will typically be a soft inquiry on your credit report (TD Bank personal loan options are an example).

Other types of home improvement loans include home equity loans or HELOC, both of which allow you to borrow against the equity you’ve built up in your house. These are secured loans and generally carry lower interest rates than unsecured personal loans because you’re offering up an asset to secure the debt. However, these loans may be harder to obtain than personal loans.

Use a Home Equity Loan

A home improvement project can range from a small facelift to knocking out walls and expanding your living space. Most projects fall into one of two categories, a “nice to have” or a “need to have.” The first step in determining how to pay for your renovation is to figure out which category your project falls into. If you’re not sure, consult a website like HomeAdvisor for a project cost estimate based on typical costs in your area.

Once you have a rough idea of the cost, calculate how much you’ll need to borrow and decide whether it’s best to go with a personal loan, a home equity loan, or another financing method. The most important thing to remember is that any financing method should not increase your debt burden, so be careful about how much you borrow and make sure you can comfortably afford the monthly payments, especially if you’re extending a loan beyond the life of the project.

If you’re planning a larger home remodel, consider a home equity loan or a home equity line of credit (HELOC). Both work similarly to personal loans, but they allow you to tap into the equity you’ve built in your home. Home equity loans offer longer repayment terms and usually feature a fixed rate, while HELOCs act more like credit cards by providing you with a revolving line of credit that you can draw on as needed.

Both of these options are better than using a credit card for home improvements, but they can be expensive. Personal loans don’t require you to offer up your home as collateral, so they can be a quicker and more convenient way to finance a project. However, this convenience comes at a price: personal loan rates tend to be higher than those of home equity or HELOC loans. If you have strong credit, it’s worth shopping around to compare not only within but across different loan types.

Use a Home Equity Line of Credit

Homeowners can tap into their equity through a home equity loan or a home equity line of credit, also known as a HELOC. This type of financing is often considered smart for remodeling projects because homeowners typically pay less in interest rates than they would on a personal loan or credit card. Plus, the remodeling may increase their home’s value and allow them to recoup some of the costs when they sell it.

However, tapping into your home equity should be done with caution, particularly in a rising interest rate environment. Remember, your house is the collateral for these types of loans and can be repossessed if you fail to make payments. Additionally, a home equity loan requires significant documentation and typically has longer terms — 20 to 30 years — than personal or credit cards.

A home equity loan and HELOC can be used to finance remodels, but each has pros and cons. The main difference is that a home equity loan gives you all of the money upfront in one lump sum and requires a set schedule of payments (both principal and interest) until the debt is paid off, while a HELOC offers a revolving line of credit for as long as you have a balance and you only pay interest on the funds you withdraw.

If you choose a home equity loan, be sure to carefully estimate your costs and budget for the entire project. If you’re unable to pay off the debt within the term of the loan, it could be costly and even lead to foreclosure.

Finally, consider how long you plan to stay in your home and whether the renovation will add enough value to justify borrowing against your home equity. If you’re thinking of selling in the near future, for example, a kitchen or bathroom renovation that will only add to your resale value might not be worth the expense of the borrowing.

In addition, be sure to review your life insurance to ensure you have enough coverage to repay any debt left on your mortgage if something happens to you.