But how are we borrowing? And how much are we paying in interest?
What with so many of today’s reality shows focused on home improvement, it’s easy to wonder how a renovation might upgrade. your own living space. But not all of us have the financial means to make the dream of a polished home a reality.
Instead, many Americans are turning to loans and alternative financing to improve their homes through remodels and upgrades. In the past year alone, 5.41 million adults sought outside help to improve their home’s value and appearance, borrowing an average $2,990 through friends and family, credit cards, payday loans, peer-to-peer lending and even personal loans.
Finder.com assessed the popularity of five top financing options to calculate the true cost of borrowing to pay for a home renovation.
How are Americans borrowing for home renovations?
A survey commissioned by finder.com and conducted by global researcher provider Pureprofile discovered that of Americans who say they’ve borrowed for home improvements, 46.3% did so using a credit card.
Paying with plastic was followed by personal loans (25.9%), borrowing from friends and family (16.7%), peer-to-peer lending (7.4%) and short-term loans (3.7%).
Interestingly, while 7.4% of adults say they’ve turned to peer-to-peer lending for home renovations, we’re less inclined to consider P2P to fund other life events. For instance, only 0.8% of those surveyed have sought a peer-to-peer loan to pay for a vacation.
Which financing option is cheapest for a home upgrade or remodel?
We took a closer look at the five financing options arising from our survey — credit cards, personal loans, borrowing from loved ones, P2P lending and short-term loans — to learn which might be more affordable at the end of the day. After all, it’s not just the base amount or principal we end up borrowing when taking on a loan. There’s also the interest that comes with most financing.
For our analysis, we assumed that borrowers repay their loans within a specified average loan term that ultimately depends on the specific financing option. We also incorporated an average interest rate for that financial product.
Through our analysis, we found that those paying for renovations with credit cards paid an additional $297.27 on average in interest, as opposed to other options that carried higher interest rates. We calculated this amount using an average 18.62% interest rate over a repayment period of 13 months.
What’s the takeaway?
With so many ways to pay for upgrading and renovating our homes, what’s best comes down to how much you’re looking to borrow and the loan terms and interest rates you’re ultimately eligible for.
For lower interest rates and longer repayment periods, you might consider a 24-month personal loan at 10.57% interest — the national average interest rate for loans. Taking on such a personal loan for the average $2,990 Americans borrow for home renovations, you’d end up paying $312.72 in interest over the life of the loan.
Peer-to-peer lending repayment terms average an even longer 38 months, though with a slightly higher 18.01% interest rate, which results in more than $800 paid on top of the initial $2,990.
Payday loans are also an option. But most require full repayment in two weeks, which means you’d have to have a lot of what you borrow in savings already to meet the short repayment terms.
|Method||Average interest rate||Average term||Principal borrowed||Total interest over life of loan|
|Credit card||18.62%||13 months||$2,990||$297.27|
|Personal loan||10.57%||24 months||$2,990||$312.72|
|Short-term loan||400%||2 weeks||$2,990||$54.54|
|Peer-to-peer loan||18.01%||38 months||$2,990||$802.82|