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Whether you’re planning a major renovation or a DIY room refresh, home improvement projects can be costly. Home improvement loans are a convenient and flexible way to finance projects without having to pledge your house as collateral.
While you can find personal loans through traditional banks and credit unions, online lenders also offer streamlined applications and competitive terms.
Related: Best Home Improvement Loans of 2021
We’ll walk you through what you need to know about home improvement loans as you embark on your next project — big or small.
What Is a Home Improvement Loan?
A home improvement loan is an unsecured personal loan that borrowers can use to pay for remodeling, repairs, upgrades and other home improvements.
Qualified borrowers usually can borrow between $1,000 and $100,000 depending on the lender, and loan funds are repaid over two to seven years.
How Do Home Improvement Loans Work?
Home improvement loans work just like other unsecured personal loans. After applying and getting approved for financing, a borrower receives the loan funds as a lump sum — typically via direct deposit.
Turnaround times vary by institution, but many online lenders advertise same- or next-day funding once a loan application is approved.
After a home improvement loan is disbursed, the borrower starts making fixed, monthly payments that include the principal and interest on the total outstanding loan amount. Most loan annual percentage rates (APRs) range from 3% to 36%.
Depending on the lender, borrowers may also pay origination fees between 1% and 8% of the loan amount, though many online lenders boast fee-free loans.
Related: Best Home Improvement Loans of 2021
Where to Get a Home Improvement Loan
Home improvement loans typically are available through traditional banks and credit unions as well as online lenders.
If you already work with a local bank or credit union, first inquire about the lender’s personal loan options. Then, research online lenders and—where possible—prequalify to see what interest rate and terms you’re likely to get.
In addition to flexible lending terms and amounts, the best home improvement loans feature broad qualification requirements and zero fees. Consider these factors when comparing home improvement loans:
- Qualification requirements. Most financial institutions base lending decisions on traditional factors like the borrower’s credit score and income. High-income borrowers with scores of at least 700 are more likely to qualify for the most favorable lending terms. If you have a low credit score—or no credit history at all—look for a lender with less stringent qualifications or one that considers other factors, like monthly cash flow.
- Prequalification. Personal loan prequalification involves providing basic information about your finances and borrowing needs so a lender can prescreen you without a formal application. This makes it easier to compare available interest rates and determine the amount of home improvement financing you’ll qualify for from each lender. Because prequalification is based on a soft credit inquiry, it won’t impact your credit.
- Fees and other costs. Many traditional lenders charge origination fees to cover the costs of processing applications. Some lenders also charge a prepayment penalty that can increase the overall cost of the loan if you opt to pay off your balance early. Luckily, many online lenders now offer low-fee or fee-free loans, so take time to compare options upfront to save money over the life of the loan.
Other Types of Home Improvement Financing
If you’re unable to qualify for an unsecured home improvement loan, there are other financing options to help cover project costs. Consider these other types of home improvement financing before you commit to a personal loan:
1. Home Equity Loans & HELOCs
A home equity loan is a second mortgage paid as a lump sum and secured by the borrower’s home. You can use home equity loans for many purposes, but many borrowers use them to cover home improvement costs to increase the value of their real estate.
Like personal loans for home improvement, borrowers receive funds as a lump-sum payment and pay interest on the entire loan amount from day one.
In contrast, a home equity line of credit — or HELOC — lets homeowners access home improvement funds on an as-needed basis. Rather than receiving the loan funds as a single lump sum, you can draw from the funds when you need them and only pay interest on what you borrow.
HELOCs are an excellent option if your home improvement costs will be spread out over an extended period of time.
2. Cash-out Refinance
A cash-out refinance lets qualified borrowers use the equity in their homes to do everything from paying off credit cards and student loans to making home improvements or buying a vehicle.
Unlike a home equity loan or HELOC, a cash-out refinance involves replacing an existing mortgage with a larger loan and using the difference to cover other expenses.
Lenders typically require borrowers to have at least 10% to 20% equity in their home after the refinance. If your equity is less substantial, you may also have to pay for private mortgage insurance (PMI) to protect the lender’s investment and reduce the risk your mortgage poses.
3. Credit Cards
If you don’t own your home — or don’t have enough equity to qualify for a secured financing option — credit cards can help cover expenses related to home improvements. Credit card interest rates are often higher than personal loans and secured loans. Still, some companies offer 0% APR credit cards to high-qualified applicants, reducing the overall cost of projects around the house.
Introductory periods generally range from six to 21 months, and interest won’t accrue during that time. Making it easy to finance long-term home improvement projects without interest—as long as you pay off the balance before the introductory period ends.
However, keep in mind that credit card limits may not be high enough to cover the costs of large improvements. This makes cards best for smaller improvements or DIY projects with a lower budget.
If you’re looking for a way to finance your next home improvement project, start by researching home improvement loans. Prequalifying with multiple lenders can help you find the best offer for your specific situation without damaging your credit score.
If you’re unable to qualify, consider alternate options to help fund your project. Regardless of the financing route you choose, be sure to make timely payments to protect your credit score from experiencing any pitfalls.