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Should I get a personal loan for home improvements?

Using savings is often the cheapest way to fund home improvements, as you don’t have to pay any interest. But there are other options, like getting a personal loan, credit card, or remortgaging if this isn’t possible. Which is best depends on your personal circumstances, affordability, and how much you need to borrow.

6 min read
man renovating home with dog watching

What is a home improvement loan? 

A home improvement loan is a lump sum of money borrowed specifically with the intention of making changes to your home. These changes can be anything from simply redecorating to building an extension - and everything in between.

There are two main types of home improvement loan: 

  1. unsecured personal loan
  2. secured loan (sometimes known as a ‘homeowner loan’)

With both types of loan, you get the funds upfront and then repay it in regular instalments, but beyond this, there are some important differences to be aware of, which we’ll go into below.

1. How do unsecured home improvement loans work?  

An unsecured home improvement loan is essentially a personal loan that you take out for the purpose of making changes to your home. You borrow an amount of money which you agree to repay over a set amount of time, usually between one to five years. This will normally be at a fixed rate, but what it is will depend on: 

  • the amount you borrow
  • the repayment period
  • your personal circumstances (as those with higher credit scores tend to be offered more competitive rates)

Unsecured personal loans aren’t secured against anything, so you don’t have to worry about an asset you own being used as collateral if you can’t repay the loan. However, you should still keep on top of your payments, otherwise, your credit history will get damaged.

2. How do secured home improvement loans work?  

A secured home improvement loan works in a similar way to an unsecured loan in that you borrow an amount of money and repay it over an agreed period, with an agreed level of interest. However, the key difference is that secured loans require an asset, most likely your home, to be tied to the loan as a form of security.

This mitigates the lender’s risk of lending large amounts. It means that if you cannot repay the loan, your home can be sold to raise the amount you owe. But this is only ever used as a last resort. As long as you make your repayments, your home won’t be at risk.

As a result, secured loans usually for much larger amounts, because theoretically, the higher the value of your house, the more you can borrow (depending, of course, on how much of your mortgage you’ve repaid).

What type of loan is best for home improvements? 

There’s no hard and fast rule about which type of loan is best for home improvements. Whether an unsecured or secured loan is suitable will depend not only on what you’re looking to do to your home but also on your individual circumstances and the lender’s eligibility criteria. For instance, you must be a homeowner with equity in your property to be able to apply for a secured loan.

What are the pros and cons of an unsecured home improvement loan? 

Unsecured loans tend to be a good option if you’re looking to borrow under £25,000 and you have a good credit score. That doesn’t mean they’re the best option for everyone though.

Here are some of the important pros and cons to be aware of when considering an unsecured loan.

Pros  

  • unsecured loans don’t need to be secured against an asset, so there’s no risk of losing something you own if you fall behind with repayments
  • they tend to be flexible as you can choose your repayment period, from as little as one up to five years
  • you can borrow as little as £1,000 or as much as £25,000 depending on your needs and the lender

Cons  

  • interest rates tend to be higher for unsecured loans than for secured loans as unsecured loans are not tied to any collateral
  • the best rates are reserved for those with high credit scores
  • they can be expensive in the short term, as the less time you borrow for, the higher the interest rates tend to be

What are the pros and cons of a secured home improvement loan?

While secured loans require an asset for security, they can be a good option if you’re looking to borrow larger amounts. However, you need to be comfortable with the risk involved, as the loan is secured against an asset such as your property.

Here are some of the other pros and cons to be aware of.

Pros 

  • you can borrow much larger amounts with secured loans than you can with unsecured, depending on the value of your home and your eligibility
  • you may find it easier to get approved for a secured loan than an unsecured loan if you have a poor credit history or a low credit score
  • as the amounts borrowed tend to be larger, you can usually spread the repayments over a longer period, making it easier to budget each month

Cons 

  • there is the chance that you could end up losing your home if you can’t repay the loan, as secured loans are tied to your home
  • they can be expensive in the long run as you’re paying interest for a longer loan term
  • they don’t offer much flexibility in terms of repayment periods, as the larger amounts require longer periods

Read on for more information about the pros and cons of secured loans.

Can I increase my mortgage for home improvements? 

If taking out a loan doesn’t feel like the right option for you, you could consider remortgaging as a method of borrowing for your home improvement. Remortgaging allows you to use some of the equity in your home without having to sell it. If you’re using it for home improvements, it may serve to increase your home’s value.

However, it will involve affordability and credit checks and can affect your loan-to-value (how much you owe on your mortgage compared to your house value). If you borrow more against your home, your interest and monthly repayments could go up. So, it’s important to carefully consider this compared to other options first.

Read on to discover if remortgaging is the right option for you.

Can I use a credit card for home improvements? 

You could use a credit card to pay for your home improvements, depending on what they are and how much they come to. Most approved builders or contractors will accept credit cards for bigger jobs, though they may prefer cash for smaller ones.

Using a credit card for home improvement purchases can offer additional protection on payments between £100 and £30,000, thanks to Section 75 of the Consumer Credit Act. However, you may not be able to borrow as much on a credit card as you could with a personal loan.

Read on to find out the difference between loans and credit cards to help you decide. 

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