What's in this guide to home improvement loans?
- What are Home Improvement Loans?
- How to choose a home improvement loan
- Does a home improvement loan affect my credit score?
- Benefits of home improvement loans
- Risks of home improvement loans
- Bad credit and home improvement loans
- Top home improvement loans available right now
- Secured options for home improvement loans
- Alternatives to home improvement loans
What are Home Improvement Loans?
Home renovations can be expensive but will boost your living space and ultimately the value of your property.
Whether it is a new kitchen or an extension, you will still need a lot of cash to pay for everything from builders to furniture and even architects for larger projects. This is where a home improvement loan can help.
How to choose a home improvement loan?
There are two options when select home improvement personal loans.
You could apply for an unsecured loan. This is assessed based on your credit report and is usually best for amounts up to around £30,000.
If you need to borrow a larger amount then it may be worth going for a secured loan. This is a loan secured on an asset such as your property and you can usually get up to £100,000.
Terms range from five years to as long as 25. The risk with a secured loan is your property is at risk if you fail to keep up with repayments.
The rate and term are important as you need to ensure you can afford the repayments and you also need to check the amount you are offered reflects the cost of the works.
Does a home improvement loan affect my credit score?
All debts such as loans appear on your credit report. Your credit score could be reduced if you fail to keep up with repayments. Lenders may also be wary of providing finance to you if they see you have applied or already have a lot of credit.
Benefits of home improvement loans
- Don’t have to raid your savings: A new kitchen can cost on average £8,000 according to Householdquotes.co.uk while an extension could go £2,000 per m2. Not many people will have this much spare cash lying around. A home improvement loan gives you access to the money you need to fund your project.
- Boost the value of your property: You need to ensure you can meet the repayments of a home improvement loan but the changes can also boost the value of your property, which could be beneficial when you come to sell.
Risks of home improvement loans
- Your home or credit report may be at risk: A secured loan will let you access a larger amount of money but you are also putting your home at risk of repossession if you can’t afford to repay. Similarly, even with an unsecured loan, if you fall into arrears you could harm your credit score which will make it harder to access finance in the future.
- Budget: Set a budget before you borrow as you don’t want to pay too much interest for money that isn’t being put to good use. However, remember that projects can also go over budget so you don’t want to run out of money. There may also be unexpected expenses that occur along the way, meaning the loan may not stretch far enough.
Bad credit and home improvement loans
The best rates on personal loans are offered to those with clean credit scores. Lenders only have to provide the advertised rates to 51 per cent of applicants. If you are in the other cohort you may end up paying a higher rate.
Top home improvement loans available right now
- Cahoot: Cahoot has the lowest rate currently on the market at 2.8% APR. You can borrow up to £20,000 for between one and five years and need a minimum income of £6,000.
- Admiral: The best rates on personal loans are for between £7,500 and £20,000. If you wanted a lower amount, Admiral offers loans up to £7,000 for 3.4% APR for one to five years. You will need a minimum income of £10,000 and must not currently be bankrupt or received any county court judgements.
- First Direct: If you have a larger project, First Direct offers loans of between £25,000 to £30,000 for 3.3 per cent APR for up to seven years but you would need to open one of its current accounts. Those with a bigger budget could get a personal loan of £50,000 for 5.9% APR but that is only for Barclays premier customers.
Secured options for home improvement loans
You may be better off using a secured loan for big budget jobs that run closer to £100,000. The value of your property is taken into account and used as a security. You can get a secured loan of £80,000 for five to 25 years for 3.6% APR with Paragon Bank or 3.57% for £100,000.
Alternatives to home improvement loans
- Credit card: An authorised overdraft on a credit card can be a useful way to pay for items upfront especially if it is a relatively low amount. You could also find credit cards that offer cashback or interest-free spending periods. But remember to repay the bill each month or interest will be added.
- Savings: If you are not in a rush to get your works done it may be worth setting a budget and seeing how much you can afford to save each month. This means you don’t have you take on extra debt, but ensure you still have money put aside for day-to-day emergencies.
- Remortgage: Mortgage rates have hit record lows in recent years. If you have enough equity in your property you could remortgage to release some cash. This will increase your monthly mortgage repayments but will typically give you access to a larger amount than a personal loan.
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Marc Shoffman is a freelance journalist specialising in personal finance. His work has featured in Financial Times’ publications as well as The Times and Mail on Sunday.