Does a Personal Loan Make Sense for Small Home Improvement Projects?

It’s time to remodel the kitchen. Maybe you want to replace some fixtures in the bathroom or your home just needs a fresh coat of paint. But you don’t really have the cash on hand, and with remodeling costs averaging in the low five figures depending on which room you’re looking to re-do, saving up for that project could take years.

To pay for your renovations, you’re considering borrowing the money but you’re not sure of the best way to go about doing that, or if it even makes sense to do so in the first place. Perhaps you’re leaning towards getting a personal loan for that home improvement project. You have options before you, but are any of them the right choice for the amount you need? Let’s take a look at what you’re really committing to when you decide to take out a personal loan for this purpose.

Loan Options

Entering into a personal loan arrangement is certainly a viable option for finding the money you need to make small improvements on your home. This type of loan is often more attractive than a home equity loan because, while both offer fixed terms, payments, and rates, applying and being approved for a personal loan is a much simpler and quicker process.

Home equity loans allow you to borrow against the equity in your home, which then requires the additional steps and costs of appraisal on top of the bank possibly capping your borrowing amounts based on any mortgage principal you currently owe. The rates for home equity loans may also be higher, but since your home is being offered up as collateral those may vary.

In contrast, a personal loan doesn’t require as lengthy an approval process as some banks can give you an answer in a day or less, and you can receive the money pretty quick in many instances. However, making this determination really boils down to how much you’re looking to borrow.

The minimum amount that banks are willing to lend on a home equity loan is usually around $20,000. If you’re prepping your home for sale, then the home equity route might make more sense. But if your small home improvement project is going to cost far less, then it’s likely not worth the hassle of going in that direction. A personal loan is the better option since the borrowing minimum with most lenders is as little as $1,000.

The Benefits of a Personal Loan

When you borrow on a personal loan, you’re not putting up anything for collateral. These are called unsecured loans and don’t require any risk beyond your credit score. That’s not to say that taking chances with your credit rating should be considered lightly. If you are unable to make the payments on your loan, you could be causing yourself headaches for years to come as potential lenders may raise their rates or refuse to lend you money altogether in the event you need to finance a car or borrow again for another reason.

However, if you already have an excellent credit score then you already know what you’re up against. Getting approved will likely be a cake-walk for you and a personal loan makes a lot of sense for your home improvement needs. But if your score isn’t pristine, then you’ll be running into some obstacles with respect to annual percentage rates.

Lenders are willing to offer personal loans at an APR of as low as 7% to as high as 9% based upon the terms of the loan arrangement to applicants with excellent credit scores. Those who have a less than stellar credit score will find themselves saddled with far higher percentage rates if they are even approved at all. So before you decide that a personal loan is the right choice, think about what your credit score has to say about it first.

What are the Alternatives?

So you’re considering that personal loan from a bank or other lending institution and you’ve done your homework with respect to the rates you’d be paying to borrow that money. Depending on how much you actually need, you may want to mull over some viable alternatives to taking out a personal loan.

One of the more attractive choices for people with good to excellent credit is by using a 0% or low interest rate credit card. These cards are well-suited for home improvement projects that won’t cost as much or more than the minimums you’d apply for on a home equity loan. A few thousand bucks on one of these cards will cost you less in rates than with a personal loan from the bank.

But just keep in mind that most 0% offers may expire after six to twelve months and then those rates can shoot up to as high as 18-22% in some cases. So before you open up one of these accounts, be sure you can pay off these cards in the allotted time so you can get the full benefit from these low or no introductory rates. For many consumers, this is the least expensive way to get that construction loan because you won’t be paying any interest. If your credit rating isn’t excellent, then the personal loan may be your best and only option as you risk getting denied on one of these cards.

Put Cash Towards the Project

So maybe you don’t have the full amount of the improvement project in the bank. But you do have some cash on hand. You can minimize your loan commitment by borrowing a small portion of the costs and putting up the money you already have saved to cover the rest. This will reduce your loan payments and it won’t clean you out financially, either.

Borrowing less means less to pay back. Figure out if you can afford to put up a chunk of your own money toward the project to defray the loan terms and rates on less principal from your lender. This might be the solution that gets your project finished and puts you on the hook for a much smaller loan amount to be paid back.