While not a traditional choice, personal loans are an alternative source of funds for your first home improvement project. These loans are similar to home equity loans which are usually the go-to product for home repairs or improvements. They are however structured differently and entail varying risks, something that a personal loan has an upper edge as you will learn here.
Personal Loans for Home Improvements
Spring might just inspire you to level up your cleaning and look into painting or remodeling a section of your home. Enter personal loans. They are another way to fund applicable home improvement projects:
- When you have built little equity in your home or plan to use it elsewhere.
- When your project is relatively small-scale.
- When you find it too risky to put your home on the line for your loan.
Unlike home equity loans and lines of credit, personal loans keep your home safe from possible foreclosure proceedings should you miss payments.
Home Equity Loans vs Personal Loans
Aside from being unsecured, personal loans largely differ from loans that rely on your home equity or home for that matter as collateral. Their differences are illustrated below.
A personal loan is relatively easier to obtain than a home equity loan, which is essentially a second mortgage and would thus require the standard vetting process for any and all mortgages. If your home improvement project can’t wait, a personal loan should be fine.
Origination fees are also more prevalent on mortgages than on personal loans that could be exempt from sign-up fees.
A personal loan term is usually shorter than its home equity loan counterpart. Between 12 months and five to seven years, you have likely repaid your home improvement costs. With a home equity loan, the repayment period can span five to fifteen years.
A personal loan amount is smaller compared to that of a fixed-rate home equity loan or a variable-rate home equity line of credit. Personal loan proceeds range $2,000 to $50,000, ideal for a minor homework. It’s possible to apply for a higher amount but that does not happen everyday.
A personal loan rate is relatively higher than a home-equity loan. The rate you’ll ultimately get on any loan is based on your credit, income and debt-to-income ratio, summed up as creditworthiness. With the lack of collateral to back personal loans, lenders are keen to offer them at higher rates.
Some Few Reminders
The known places to get personal loans for your home-related improvements are online lenders, credit unions and banks. But if it’s low interest rates you’re after, a credit union may just be the best spot.
Not just rates, fees should also be part of your shopping for personal loans. The size of the loan’s fees could offset the potential savings you’d get from a lower rate.