Key learning points
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Unsecured home improvement loans can be a financing solution if you need quick financing, don’t want to dip into your savings or risk your home to get money for renovations.
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These loans do not require collateral, so they are issued on a credit basis.
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Before taking out an unsecured home improvement loan, consider the disadvantages, such as shorter repayment terms and higher interest rates than secured loans.
An unsecured home improvement loan is a type of personal loan that does not have any assets attached to secure the debt. Unlike mortgage loans or home equity lines of credit (HELOCs), if you default on an unsecured loan, the lender cannot foreclose on your home. Additionally, you do not need any equity in your home to qualify for these loans as they are provided based on creditworthiness.
What you need to know about taking out an unsecured home improvement loan
There are five key considerations to keep in mind when deciding whether an unsecured home improvement loan is the best option for you.
Unsecured loans are available in lower dollar amounts
Because unsecured loans are riskier for lenders, lower maximum loan amounts usually apply. Many lenders allow you to borrow up to €50,000, although some have a maximum of €100,000. However, the loan amount may not be sufficient to cover the costs of the home improvement you have in mind.
The loan amount is based on your income, debt-to-income ratio (DTI) and your credit score. If you have more than $100,000 in equity in your home, you may be able to borrow more money with a home equity loan than with an unsecured home improvement loan.
Takeaway
The loan amount you’re approved for may be less than what you would get with a home equity loan product, depending on your income, current debt levels, and credit status.
Repayment terms are usually shorter
Another factor to consider when deciding how to pay for home improvements or home repairs is that loan terms for unsecured personal loans are typically shorter than for secured loans. While home improvement loans typically have terms ranging from two to 12 years, home equity loans have terms ranging from five to 30 years.
A longer repayment term may be better for your budget because your monthly payments may be lower. The disadvantage of this, however, is that you end up paying more interest over the life of the loan.
For example, if you get a 10-year home improvement loan of $50,000 with a fixed interest rate of 8 percent, you will pay $607 per month and $22,796.56 in interest over the life of the loan. But if the term is extended to 30 years, your payment drops to $367, but you pay $82,077.62 in interest.
Takeaway
A shorter loan term means a higher monthly payment, but you’ll likely save a bundle in interest over the loan term.
They are available quickly and some are free
Unsecured loans are issued based on your creditworthiness and income, so you can get them as quickly and easily as you would a credit card. Some lenders also offer same-day approval and deposit your money into your account the next business day. The seamless process and fast financing times mean you can start your home improvement projects sooner rather than later.
Additionally, some lenders, such as LightStream, charge no fees for these loans. Common fees include application fees, origination fees, and returned payment fees. There is also the possibility of prepayment penalties, which are charges for paying off your loan early.
If you get a mortgage loan or HELOC, you may have to pay closing costs that can cost you several thousand dollars – usually between 2 percent and 5 percent of the loan amount.
Takeaway
Unsecured home improvement loans often have fast funding times and minimal fees compared to home loan products.
Without collateral you can pay a higher interest rate
If you opt for an unsecured home improvement loan, you may pay a higher interest rate because these loans are riskier for the lender. Home improvement loan rates currently range from approximately 6 percent to 36 percent, with the average rate being just over 11.5 percent.
In contrast, the average home loan interest rate ranges from about 8 percent to 10.73 percent, and the average HELOC interest rate ranges from just over 9 percent to 12.25 percent.
The rate you receive on your home improvement loan depends on a number of factors, mainly your credit score. In general, the best rates are reserved for borrowers with the highest scores.
To get an estimate of what your rate might be, pre-qualify for a loan from multiple lenders if possible.
Takeaway
The interest rate on an unsecured home improvement loan may be higher to compensate for the risk the lender faces since it is an unsecured debt product.
You need good credit
Do you want to get an unsecured home improvement loan? To qualify for a large loan amount, you need good credit: a credit score of 670 or more, according to the FICO credit scoring model. You may not meet the lender’s minimum credit score requirements if you have poor or poor credit. Even if you are approved, you will most likely qualify for a lower loan amount with a higher interest rate.
For example, a loan with a term of five years, € 15,000 and an interest rate of 6 percent will cost you € 2,399.52 in interest. But a loan for the same amount with an interest rate of 20 percent will cost you €8,844.50.
If you have bad credit and are willing to pay more for a home improvement loan, consider applying for a home improvement loan for bad credit. Some lenders may approve you for a loan with a credit score as low as 550.
To increase your chances of qualifying for a loan or getting a lower rate, you can apply with a co-borrower or co-signer if the lender allows you. Alternatively, you can take steps to improve your credit score before applying, such as paying off debt.
Takeaway
A good credit score is generally required to get the most competitive terms on an unsecured home improvement loan.
Alternatives to unsecured loans
If you prefer to explore other options, consider paying by cash or credit card.
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It may take some time to save enough to pay for home improvements. The advantage is that you can complete projects without accumulating debt and having to pay back lenders for years.
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You can use a credit card to cover the cost of minor upgrades. If possible, use a card with a 0 percent introductory rate to avoid paying interest. That said, you’ll want to make sure you pay off the balance in full before the promotional rate period ends for this payment strategy to make sense. Otherwise, a small purchase could cost you hundreds or thousands in extra interest.
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Secured loans are ideal if you have less than perfect credit because they are generally easier to qualify for since they are backed by an asset. Covered loans include home loans and HELOCs.
While these may take longer to finance (as previously mentioned), they may be worth considering in this scenario as you will likely get a lower interest rate. Likewise, they can be a better option for unsecured loans if you need to borrow a larger amount and need a more comfortable repayment term.
Managing the loan responsibly can also help improve your credit score over time if the lender reports payment activity to the major credit bureaus – Experian, TransUnion and Equifax.
In short
Unsecured loans can be a viable option to pay for home improvements without dipping into your savings. Plus, unlike home equity loans or HELOCs, they’re less risky because your home isn’t automatically at risk of foreclosure if you fall behind on the loan payments.
But if you’ve already tried to apply for an unsecured loan and haven’t been approved, you’re not completely out of luck. Instead, consider paying with cash, using a credit card, or getting a secured loan.
