Using a Personal Loan for Home Improvements

Itching for a new kitchen? Need to weatherproof your roof? A personal loan could get you the cash you need to make that long-awaited upgrade or much-needed repair to your home. Here are a few things to consider if you’re looking to fund your next home improvement initiative with a personal loan.

Evaluate your funding needs

When it comes to personal loans, there are several considerations that could impact the type of loan you’ll need for your next home renovation project.

Secured vs. Unsecured Loans. Because Personal Loans are most often unsecured, you’ll likely pay a higher interest rate than with a secured loan (such as HELOC). If you don’t want your home to be used as collateral (as with HELOCs), a Personal Loan is a good option.

Type of Renovation. If your potential renovation is a larger project on the more expensive side, a HELOC might be a better option if the project will increase the value of your home. For most HELOCs, you need a substantial amount of equity in your home (usually around 20% or more). But you may still want to consider a personal loan if your project is on the smaller side.

Necessity. Weatherproofing a leaking roof is a necessary repair, but that shiny new kitchen remodel you’ve been eyeing? Maybe that can wait. You may want to start saving for purchases that aren’t a true necessity in the short-term and then save up for those aspirational home projects down the road. But you’ll also want to consider when necessary home repairs require more immediate funds.

When to consider other loan types

Depending on your financial circumstances and the needs of your home renovations, there may be reasons to consider other types of loans for your next project. In addition to weighing your personal loan options, here are some other types of loans you may want to compare.

HELOC? So, about that HELOC (which stands for Home Equity Line of Credit) — as mentioned, these usually come with lower interest rates than Personal Loans, and are stretched out over a longer term usually ranging from 5-20 years. In the end, you might end up paying more interest on a longer term HELOC than with a Personal Loan. Note: HELOCs interest rates are often tax deductible.¹

Cash-Out Refi. Another option to consider is a cash-out refinance. You’ll get a new mortgage with new terms (and possibly a lower interest rate), while being able to get cash out by borrowing against the equity in your home. If you need $10,000 for a repair, for example, you may be able to get the cash and lower your monthly payments through new mortgage terms and rates, potentially resulting in overall savings. But be sure to look at the overall fees and costs in the loan estimate before choosing this option, as it could end up being more expensive and simply not worth it.

If you still have questions about whether a personal loan is right for you, check out our guide to taking out a personal loan, here.