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A home improvement loan enables you to borrow a fixed amount of money to pay for property renovations and improvements. The loan is repaid to the lender in monthly instalments, and this payment includes interest charged on the initial sum.
Home improvements can range from tasks such as replacing carpets and painting walls to more complex renovations such as a new bathroom or an extension. Many of these larger improvements can also help to add value to your home, making it a sensible investment.
There are two main types of home improvement loan:
Unsecured home improvement loans are also known as personal loans and allow you to borrow without using an asset such as your home as collateral. How much you can borrow will usually be based on your credit history as well as your income and monthly expenditure.
Secured home improvement loans allow you to borrow larger sums of money and interest rates are typically more competitive than for unsecured loans. In return, however, you will need to use the value of your home as security. This means that if you are unable to keep up with your repayments, you could lose your home.
If you have a good credit rating and are confident you can afford your monthly repayments, a home improvement loan could be a good option for funding property renovations. The better your credit score the more likely you are to secure a more favourable loan rate.
If you are looking to tackle smaller projects such as redecorating or updating your kitchen, an unsecured home improvement loan is likely to be the more appropriate choice as it will enable you to borrow sums of up to £25,000 and you won’t need to secure this against an asset.
However, if you’re planning larger works such as an extension or loft conversion, a secured home improvement loan will allow you to borrow much larger amounts of up to £100,000. Secured loans are also generally easier to get accepted for if you have a lower credit score due to the fact you’ll use your home as security.
Whether you’re looking to fund simple DIY tasks or pay for major property renovations, a home improvement loan could offer a competitive way to do so. Before taking the plunge, however, it pays to weigh up your options carefully and remember that if your loan is secured, you risk losing your home if you cannot repay it.
Rachel Wait - Personal Finance Journalist
Before applying for a home improvement loan it is worth considering the following:
How much do you need to borrow?
This will help establish which type of loan you need, but more importantly you will need to ensure you don’t borrow more than you can afford to pay back.
What loan term do you need?
Loan terms are typically around one to seven years for unsecured loans, and up to 25 years for secured loans. When considering how long you need to repay your loan, keep in mind that while a longer loan term can reduce your monthly repayments, you will also end up paying more interest overall.
What does your credit rating look like?
It’s also worth checking your credit score to see how likely you are to get accepted for a loan before you apply. If your credit score isn’t up to scratch, take steps to improve it such as paying bills on time, registering on the electoral roll and correcting any mistakes on your credit report.
Is there a fee for repaying your loan early?
Some loans have early repayment charges that kick in if you want to pay off your loan before the end of the term. Always check carefully before applying.
Yes you can, but only if you are applying for an unsecured loan that does not require you to put up your home as collateral.
This will partly depend on your credit history and financial circumstances, as well as the type of loan you apply for.
Unsecured home improvement loans typically allow you to borrow between £1,000 and £25,000, while secured home improvement loans are usually for upwards of £25,000.
If you are unable to keep up with the repayments on your loan, your credit history could be affected, along with your chances of getting credit again in the future. What’s more, if your loan is secured against your home (or other asset), this could be repossessed.
In addition, if you’re looking for an unsecured home improvement loan, interest rates can be higher for smaller borrowing amounts. The most competitive rates are typically for sums of £7,500 or more.
A poor credit score won’t automatically exclude you from getting a home improvement loan, but your choice of lenders is likely to be more limited and you may pay a higher rate of interest.
Secured loans tend to be easier to get accepted for but remember you risk losing your home if you cannot keep up with your repayments.
If you don’t qualify for a home improvement loan or you would simply prefer not to use one, there are alternatives to consider:
Savings: If you’ve built up a sizable savings pot, it can make better financial sense to use some of these funds to pay for home improvements rather than borrowing.
Credit cards: For smaller projects, you could consider using a zero-interest purchase credit card. You won’t usually be able to borrow as much as you could with a loan, but you will be able to spread the cost of your spending interest-free for a number of months.
Remortgage: You may be able to borrow extra money by taking on a bigger mortgage from your existing lender. Just keep in mind that although mortgage rates are currently low, you could end up paying more in interest overall if the term is longer than for a personal loan.
Further advance: Your mortgage provider may agree to give you an additional loan on top of your mortgage. This additional loan is charged at a separate interest rate but will be considered part of your total borrowing. Again, however, you could end up paying more in interest compared to a personal loan.
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