A personal loan could be a good choice, but you may have other options, too.
- Personal loans let you borrow more for any purpose, including home renovations.
- There may be an even more cost-effective borrowing option for improving your home.
- A home equity loan may be a better choice for your situation, especially if you have a higher credit score.
Some people purchase homes knowing full well that they’ll want or need to make improvements at some point in time. Maybe you bought a home with an outdated kitchen. Or maybe your basement needs to be finished so you can add another floor of living space to your home.
In an October survey by Thumbtack, 90% of current homeowners said they’re planning to make at least one improvement to their home within the next year. And so if you have similar plans, you’re in good company.
Improving your home could add nicely to its value, and it could also make your daily life a lot more pleasant and comfortable. The only problem with making updates is having to swing the cost. If you don’t have a massive pile of cash sitting around in your savings account, you’ll need to borrow money to finance your home improvements.
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Now you may be inclined to take out a personal loan to pay for your upcoming renovation project. But before you start the process of shopping around for a personal loan, you may want to look at another option that could end up being more affordable for you.
Do you have equity you can tap?
A personal loan could be a great bet for financing home improvement projects. These loans let you borrow money for any purpose, and they tend to come with fairly competitive interest rates.
But if you own a home, there’s a good chance you have some equity in it at this point. That’s because home values are up on a national level. And if that’s the case, you may find that a home equity loan allows you to borrow money for a renovation at a lower interest rate than what a personal loan will cost you.
Why might that be the case? Home equity loans are secured loans — they’re based on the equity you have in your home. If you fail to keep up with your home equity loan payments, your lender has some recourse, because in an extreme situation, your lender could force the sale of your home and use the proceeds to get repaid.
Personal loans are a bit more risky in this regard. Personal loans are unsecured, so they’re not tied to a specific asset. Because of that, personal loan lenders take on more risk than home equity loan lenders.
Now if you have a strong credit score, you might qualify for a relatively low interest rate on a personal loan. But even so, you might manage to borrow at an even lower rate if you go the home equity loan route. So if your goal is to reap the most savings in the course of financing a renovation project, a home equity loan may be your better bet.
How much risk do you want to take on?
Of course, home equity loans aren’t without risk. As mentioned, if you fall too far behind on one, you could risk losing your home. That won’t happen with a personal loan, so you may feel more comfortable with that option.
But do be aware that falling behind on personal loan payments can still have pretty bad consequences. It could damage your credit score, making it very difficult to borrow money if you end up in a jam.
So either way, you’ll want to make sure that whatever loan you take out to pay for home improvements is affordable for you. And if you’re worried about keeping up with your loan payments, you may want to put your renovation plans on hold until you’re more financially secure.
Our picks for the best personal loans
Our team of independent experts pored over the fine print to find the select personal loans that offer competitive rates and low fees. Get started by reviewing our picks for the best personal loans.