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Pros and cons of using a personal loan for home improvements

Personal loans offer quick cash for Home Depot trips and contractors, but larger renovations may require a different type of loan.

Maybe you want to spruce up your home to get it ready to sell. Maybe you’re just tired of that 80s-style kitchen. A personal loan could be the answer if you’re looking for the extra cash to update your home. But before you do, you’ll need to weigh whether it’s the right decision for your financial situation and your goals. Let’s uncover the pros and cons of using a personal loan for your home improvement.

Personal loans snapshot

Here’s the lowdown on what you can generally expect from a personal loan. Personal loans allow you to borrow a lump sum in exchange for repaying the loan in equal monthly installments. The best personal loans are generally available for amounts between $5,000 and $100,000, with terms from two to seven years, but this depends on the lender you choose.

Lenders generally want to see good credit, regular income and a low debt-to-income ratio to qualify for the best interest rates. Interest rates as of the first quarter of 2024 averaged 12.49% for a 24-month personal loan, according to the Federal Reserve.

So, let’s say you’re in a good position to qualify for a personal loan at a decent rate to fund your home improvement — is it the right decision?

Pros of using a personal loan for home improvement projects

Here are a few of the perks of opting for a personal loan to tackle your home project.

May not need collateral

Some types of loans require collateral, and with a home equity loan, your house is the collateral. However, many personal loans don’t require any collateral at all — which means the house you’re pouring blood, sweat and tears (and money) into won’t be on the line.

Quick cash

Unsecured personal loans can be funded quickly. Some lenders may get you funded as soon as one business day. This timeline is often much quicker than what you’d get with a home equity loan or HELOC since the lender doesn’t have to assess your home’s value to make a funding decision. Quick funding could be vital if your home improvement is more of an emergency repair.

Predictable payments

Personal loans come with fixed-rate monthly payments for a set term, so you know exactly what you’re getting into. Predictable payments allow you to budget for other financial obligations and projects over the long term.

Build your credit

On-time payments are a sure-fire way to build your credit. A personal loan could offer a way to get your project done faster and help you build your credit in the process. Plus, depending on your credit mix, adding a personal loan could help diversify your accounts, which is another way to build your credit. Better credit means lower borrowing costs in the future.

You may be able to pay off your loan early without penalty

If you’re making improvements to increase your home’s value before selling, strongly consider a personal loan with no prepayment penalty. While not all lenders waive this fee, lenders like Lightstream offer personal loans with no prepayment penalty.

Let’s say you’re taking out a loan to update the kitchen and other minor improvements before listing it. In the right market, making these updates could increase your profit by a lot. If you have enough equity in your home, you could make enough to cover your loan’s costs and still have profit left over. Though it isn’t the right decision in all scenarios, paying off your loan early can save you money on interest.

Cons of using a personal loan for home improvements

While there are quite a few upsides to choosing a personal loan for your home improvement project, there are downsides when comparing this type of financing to other options.

Potentially high fees and interest rates

Fees for personal loans can come in the form of origination fees, late fees and, in some cases, prepayment penalties. Also, interest rates on personal loans versus home equity loans or HELOCs tend to run higher since you aren’t putting up any collateral. And, the lower your credit score, the more you’ll pay in interest.

Loan size limits

If you’re planning a major renovation, you may not qualify for enough money to cover the costs with a personal loan. While some personal loans may offer up to $100k to the best credit borrowers, many personal loans have limits of around $50k or less.

Shorter repayment periods

Personal loans may offer terms up to seven years in some cases, but many personal loan lenders have maximum terms of five years. Shorter terms mean larger payments, which may be harder to budget for or unaffordable for some borrowers.

Wrap up

In many cases, a personal loan could fit the bill for your next home improvement project. Personal loans especially make sense if you’re tackling a specific one-time home improvement where you know how much cash you’ll need to complete the job. You’ll get the cash you need quickly with predictable repayments. However, if you’re not sure how much your project will cost or have several ongoing projects, a home equity loan or home equity line of credit may be a better fit.

About the Author

Megan B. Shepherd is a personal finance editor at Finder committed to helping Americans navigate the financial world of loans and insurance. Megan’s expertise has graced the pages of Forbes, Fox, Time, Reviews.com, and carinsurance.com, adding invaluable information related to loans and insurance. Megan’s adept knowledge of financial topics has also led to contributions to reputable publications like Nasdaq and MediaFeed, where she intricately dissects and explains personal loans, financial strategies and smart borrowing tactics.

This article originally appeared on Finder.com and was syndicated by MediaFeed.org.

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Editor, Loans

Megan B. Shepherd is a personal finance editor at Finder where she helps people navigate the financial world of loans. Her personal finance expertise has been featured on Forbes, Nasdaq, MediaFeed, Fox News, Time, Reviews.com, and carinsurance.com, adding invaluable information related to personal loans, financial strategies and smart borrowing tactics. Megan graduated from the University of Texas at Dallas with a BS in Business Administration with an entrepreneurial focus. She's worked as a certified financial adviser and has earned certificates of completion from A.D. Banker & Company. See full bio

Megan B.'s expertise
Megan B. has written 37 Finder guides across topics including:
  • Personal loans, business loans and home loans
  • Underwriting guidelines
  • Life, disability, car, health, accident, critical illness, dental and vision insurance
  • Policy comparison

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