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What Is a Home Improvement Loan?

If you love your home, but it’s just not functional for your needs, renovating your house can be a lot cheaper — and less stressful — than moving. You can get the features you dream of for less than you’d spend on the real estate agent fees and closing costs necessary to sell your home.

However, remodeling your home can be costly, and few people have enough money in the bank to pay for renovations in cash. While many people turn to home equity lines of credit (HELOCs), taking out a home improvement loan may be a better choice for you. Let's look at both options. 

How home improvement loans work

Home improvement loans are a form of personal loan. They’re unsecured, so you don’t have to put up any property as collateral. And, depending on the lender, you can borrow up to $50,000  and have as long as seven years to repay the loan.

Because home improvement loans don’t require collateral, lenders review your credit profile to determine whether or not to issue you a loan and to decide what interest rate you’ll receive. If you have good to excellent credit, you could qualify for a low-interest loan with affordable monthly payments, making your home renovations more manageable on a budget.

For example, let’s say you want to remodel your bathroom. According to Home Advisor, the average cost of a bathroom renovation is about $10,000. If you took out a home improvement loan and qualified for a three-year term at 6.79% interest, you’d have a monthly payment of $308. Over the course of three years, you’d repay $11,088. Interest charges would only cost you an additional $1,088 than the actual cost of the remodel, and you’d be able to spread out your payments, rather than needing to pay all at once.   

See also: What is an FHA Title 1 Home Improvement Loan?

Qualifying for a home improvement loan

Getting a personal loan is often much easier than applying for a HELOC. Rather than having to submit mountains of paperwork and wait weeks, you can apply for a personal loan online in just a few minutes and receive a decision right away. If approved for a loan, you can get your money in as little as two business days.

To qualify for a personal loan, you’ll have to provide basic information about yourself, such as your name, address, Social Security number, income, and monthly rent or mortgage payment.

Once you submit your application, lenders will review your credit report, including your current debt-to-income ratio and payment history. Having a good credit score improves your chances of qualifying for a low-interest loan.

Looking for a personal loan? Check out our top pick for 2019. Check Rate

Home improvement loans vs. HELOCs

Home improvement loans can make a lot of sense, especially if you have excellent credit. But they’re not your only option. Another way to pay for your renovations is with a HELOC. With a HELOC, you take out a secured loan that uses your home’s equity — the value of the home minus what you owe on the mortgage — as collateral.

HELOCs differ from home improvement loans in several key ways:

  1. Longer loan terms: HELOCs can have very long loan terms — as long as 15 or 20 years.  Home improvement loans can have much shorter terms, which means you’ll have higher monthly payments, but you'll be out of debt faster.

  2. Access to revolving line of credit: With a HELOC, you have access to a revolving line of credit. That means if you have future renovations or repairs that come up, you have continual access to funding. Home improvement loans are different; they are one-time loans. Once you use up the money, you’d have to apply for another loan to get more cash.
  3. Potentially lower interest rates: Because HELOCs are secured by your home’s equity, they tend to have low interest rates. Home improvement loans are unsecured, so they typically have higher rates than HELOCs. But that also comes with some serious food for thought ...

  4. Higher level of risk: While HELOCs can be an attractive funding option, they can be very risky. If you fall behind on your payments and default on your loans, the lender can foreclose on you and you could end up losing your home. With a home improvement loan, lenders can’t seize your house if you default on your loan, so you’re more secure. There’s still consequences to missing payments, such as a damaged credit report, but your home is never at risk.

Applying for a home improvement loan

When deciding between a home improvement loan and a HELOC, it’s important to keep your goals and needs in mind. Depending on your desired renovations, a home improvement loan can make more sense than a HELOC.

Check out our current picks for the best deals in home improvement loans

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