Using a personal loan to finance a home renovation

Whether the roof needs to be replaced or the kitchen is in dire need of an overhaul, home repairs and renovations can present a major unexpected strain on your household budget. If you don't have enough money in your bank account, or don't want to clear out your savings account to pay the bill, you'll have to consider other alternatives to finance the projects.

One popular option is to tap into your home's equity, borrowing against its value and reinvesting those funds back into the property. But you might be reluctant to take this route, especially if you don't have much equity built up in your home just yet.

Personal loans are one alternative option for financing home improvements. These funds are typically offered through a bank or credit union, though a friend or family member may also be willing to lend you money for the cause and set up repayment terms.

A key advantage of personal loans is their predictability. Amy Fontinelle, writing for the financial site Bankrate, says the loan will set the total amount of money you're borrowing, a fixed interest rate, and the repayment term. These terms are more solid than other loans, whose costs can vary due to factors such as changing interest rates.

The fixed loan amount will also prevent you from overextending yourself. Loans that tap into a home's equity have a draw period, during which you can continue to borrow money for various projects. A personal loan allows you to focus on specific work you'd like to complete.

Personal loans are unsecured, so you won't have to put up any collateral. This makes them less risky than home equity loans or lines of credit, where you put your property on the line when you borrow money. A lien can still be placed on your home if you fail to keep up with your loan payments, but this will negatively affect your prospects of selling or refinancing the home instead of making it vulnerable to foreclosure.

It's typically easier to qualify for a personal loan than other types of loans. While your equity in the home will help determine whether you qualify for a home equity loan, it won't be considered in your application for a personal loan. Teri Williams, writing for, says the minimum amount is often quite low. Tobie Stanger, writing for Consumer Reports, says borrowers may be able to qualify for a personal loan on the same day they apply for one.

Personal loans are typically designed to have a brief repayment period. Williams says the loans can usually be repaid in three to seven years.

The loan will have few fees attached to it, if any. Fontinelle says home equity loans often have several costs added on, such as appraisal fees, and will impose a penalty if you repay the loan early. By contrast, personal loans have origination fees but none of the costs associated with determining the value of your home.

One tradeoff to consider with personal loans is the interest rate. Matt Frankel, writing for the financial site The Motley Fool, says the rate will likely be lower than what you find on a credit card. However, it will still be considerably higher than a home equity loan, since the lender assumes a greater risk by approving an unsecured loan.

Personal loans may not be feasible for some home improvement projects. The legal site Nolo says personal loans are typically capped at a certain amount, such as $10,000, which won't be enough to completely finance more expensive work such as complete kitchen renovations.

While personal loans can be repaid more quickly, this can also result in considerable monthly payments. You'll want to make sure you can shoulder this burden for the repayment period.

Some alternatives may fit your situation better than a personal loan, especially if you are financing a less expensive project. Frankel says you might look for a credit card with a zero percent introductory rate and a borrowing limit sufficient to cover the expense. As long as you can make regular payments during the introductory period, you'll be able to pay off the outstanding amount before the higher interest rate kicks in.


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