Is it worth getting a home improvement loan?

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If you’re looking to make home improvements—whether it’s moving up or out for more space, new electrics or just fresh decor—the bill could soon add up to thousands of pounds. And, unless you have this cash on hand, you’ll need a way to fund your plans.

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One option to explore is a personal loan. A personal loan is a cash amount from a bank or other lender that is not secured against your property or any other asset. And it can be a relatively inexpensive way to borrow a large chunk of money.

What is a ‘Home Improvement’ Loan?

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Home improvement loan is essentially a personal unsecured loan, which you can use for home renovation. As part of an online loan application, the lender will ask what you plan to use the money for and ‘home improvement’ is listed as one of the options.

The term ‘home improvement’ includes all kinds of changes you would like to make to a property, ranging from ‘affordable’ jobs, such as remodeling and improving a garden, to more expensive jobs, such as installing a new kitchen. or add patronymic or extension.

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How much can you borrow against an unsecured loan?

It is possible to borrow between £25,000 and £30,000 through a personal loan, although you may need less. The minimum borrowing is usually set at £1,000, although there may be better ways to borrow for smaller amounts such as a 0% purchase credit card.

It may seem counterintuitive, but interest rates for larger personal loans tend to be cheaper than for smaller ones. For example, the cheapest annual percentage rates (APR) are linked to loans between £7,500 and £15,000. However, this does not prompt you to borrow more than necessary.

How do I get a home improvement loan?

The best way is to go online and compare deals from a wide selection of lenders to find the cheapest rates available to you.

You need to know the amount you want to borrow, and the time period you want to repay that money.

When you apply online, you can be able to make a decision almost immediately. If you are successful, you can get the money in your account within a few days, or in some cases, even earlier.

Is it worth getting a home improvement loan?

Unless you are in a fortunate position to have the necessary cash on hand, a home improvement personal loan makes good sense. An unsecured personal loan comes with fixed repayment terms and fixed interest rates. This means that you may be able to complete a full range of home improvements with just one loan that you know you can afford.

What are the drawbacks?

When applying for a personal loan, you may not qualify for the advertised low rates, as lenders are not legally obligated to give their advertised ‘representative’ APR to more than 51% of successful applicants.

The loan deal you are offered will depend on your personal circumstances and credit history, so the APR you actually get could be much higher.

Equally, as you are not holding your home or any other asset as security, you may not be able to borrow as much with a secured loan (see below).

Also, you need to be aware that there may be a penalty (eg, 28 days of interest) if you choose to repay a personal loan before the initially agreed term. First go through the terms and conditions carefully.

What about secured loans for home improvement?

Another type of loan you can consider to fund your home improvements is a ‘secured loan’. This type is tied to one of your assets – usually your property.

As you are providing the collateral, there is less risk for the lender. As a result, it can be easier to get a secured loan than a personal loan – even if there is a flaw in your credit history.

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How much can you borrow on a secured loan?

Secured loans are usually for longer tenures than personal loans, ranging from five years to 25 years. They are also usually for large sums of money, often in excess of £25,000 – and potentially much more.

The interest rates on a secured loan can sometimes be lower than on a personal loan. But once again, the rate you actually get will depend on your individual circumstances and your credit rating.

What are the dangers?

If you keep your home as security, you run the risk of taking your property back if you can’t keep up with the repayments on your secured loan. With that in mind, it’s important to make sure whatever work you’re doing is affordable now and in the long term.

Also, there may be less flexibility than an unsecured loan when it comes to things like paying more or paying off your loan early.

Check Eligibility Before Apply

While applying for any type of loan, you need to be careful not to search too much, as these will leave a mark on your credit file. This can make lenders less inclined to lend to you.

Use eligibility tools that do a ‘soft credit search’ to show you which deals you are most likely to be accepted for without affecting your credit rating.

what are the options?

  • correct credit card. Cash or a deal offering a generous 0% window on purchases that gives you time to pay back the money you spend. But note, that when the card’s interest rate returns to normal levels, the cost may add up.
  • To mortgage. If your mortgage deal is coming up for renewal, you can change lenders and top up your loan in the process (income and circumstances permitting). If you can use a much cheaper mortgage rate in the switch, you will offset some of the cost.
  • Further advance: You may also be able to borrow more on your current mortgage. Talk to your lender to see if this is a possibility. You’ll need to demonstrate that you can keep making repayments on the larger loan — and be assured that the work will add value to your home.

tread carefully

When you’re starting to improve a home in the hope that the money you invested will turn into an inflated value when you sell it, don’t assume this will happen. Some improvements will increase the potential of your home, but not all.

For example, adding a conservatory or converting your garage into a bedroom or home office can give you additional living space. Conversely, projects such as landscape gardening or installing solar panels can cost a lot while not actually adding that much value.

The main thing is to carefully plan and fund home improvements in the most economical way possible – ensuring that any costly work you undertake adds real and lasting value.

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frequently Asked question

Can I re-mortgage for home improvement?

If your current mortgage deal is up for renewal, you can increase the size of your loan in the process of re-mortgaging to a new lender. This would mean going through a test of new credit and affordability but if you unlock a better interest rate in the process, it may be the home improvement borrowing option that makes the most sense.

It also means reducing monthly repayments, as the loan can be set aside over the remaining term of the mortgage, not the maximum five years typically associated with personal loans.

However, a large mortgage has a long-term impact on your mortgage payments as well as your future borrowing ability. And if you re-pledge half of the existing home loan, you may incur early repayment charges, which may not make it worthwhile.

Can I use a pre-approved loan for home improvement?

It is only the nature of the loan that is different in this situation as compared to other forms of lending. With a pre-approved loan, a lender indicates to a customer that it will lend money based on the advance information provided, as long as the fraud investigation is passed and the application details are correct.

Pre-approved offers come with a guaranteed Annual Percentage Rate (APR). This means that the interest rate the customer gets for the loan is the rate they will pay in the end.

What is Home Equity Loan?

A home equity loan is another name for a secured loan, where you borrow against the value of your home. It uses your property as collateral which means your home could be at risk if you are unable to make repayments.

To calculate the amount they will lend, secured loan providers compare the present value of your property with the amount of loan already outstanding on it. They will factor into your debt-to-income ratio (i.e. regular outgoing payments compared to monthly income) as well as your credit score.

However, you should think very carefully about taking out other loans secured against your home. For the purposes of financing home improvements, it can be avoided entirely.

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