Types of loans available to fund home improvement

Home renovation makes a property accommodating, but some people refurbish only to enhance the sales price. However, it is vital to note that not all kinds of improvement projects could add to the market value. Before taking up any remodeling projects, make sure it will serve your purpose.

Depending on your improvement project, you might need a small amount of money or a large sum of money. Thankfully, there are various types of funding available to renovate your house.

First off, you should rely on your savings. Experts suggest that you must have stashed away a significant size of money to take up a renovation project. The larger the savings, the better it is because you could save an inordinate amount of money in interest.

Borrowing money from a direct lender includes interest payments, and it could be a whopping sum of money if your credit report is not up to scratch. However, if your savings fall short of cash, you should turn to direct lenders. Make sure you weigh up all options carefully so you know the loan you are using is not only serving your purpose but is also affordable.

What type of home improvement loan is ideal for you?

There are various types of loans for home improvement , and there is no one-size-fits-all loan. It hinges on your credit score, the purpose of why you need these loans, and above all, your affordability. Caution is enjoined while using these loans. Financial experts always recommend that you carefully calculate your repaying capacity because otherwise, you might be trapped in an ongoing cycle of debt.

Home improvement loans are secured and unsecured. While the former is known for being more affordable than the latter, you are at risk of losing your house in case of a default. The latter is also subject to adverse consequences.

Each type of home improvement loan comes with certain drawbacks. You should carefully compare benefits against drawbacks to ensure that your funding decision does not cost you a lot of money down the line.

Here are the types of home improvement loans you might look for:

Personal loans

Personal loans, also known as unsecured loans, could help you fund the gap in your home improvement budget. These loans are considered much more affordable as they are not subject to collateral, and this is the reason why these loans carry high interest rates. Unsecured home improvement loans come with a smaller amount of money to be paid back over a period of five years, depending on the borrowing amount. Here are the pros and cons of unsecured home refurbishment loans:

You can borrow as little as E1,000. While some lenders claim to provide you with up to E25,000, the maximum borrowing limit varies by lender.

You will pay down the debt in fixed monthly installations. Some lenders may allow you to start making payments after a few months rather than immediately.

You do not have to use your home as collateral.

You cannot be permitted to borrow a large sum of money as the risk on the part of a lender is quite high.

It could be difficult to keep up with payments because the size of monthly installations will be large. While the maximum repayment term of these loans is advertised as five years, most lenders wrap up the loan term within 18 months.

You will need a stellar credit report to get approval. Hardly a few lenders approbate bad credit applications, but they are notorious for charging high interest rates.

Secured loans

When you secure your house against a loan, it is called a secured home loan improvement. Collateral diminishes the risk on the part of a lender because they could repossess your house and liquidate it to cover their money in case of a default. Secured home improvement loans allow you to borrow much more than unsecured loans and take more than five years to discharge. In relation to interest, they are less expensive than personal loans. It means you will end up saving a whopping sum of money. Here are the upsides and drawbacks of secured home renovation loans:

You can borrow a large amount of money, probably up to E100,000. However, the maximum borrowing amount varies by lender.

Secured loans are aimed at subprime borrowers, too. Interest rates will be a shade higher, but be that as it may, they cost you less than unsecured home remodeling loans.

You will have a longer repayment period to pay back the debt. You could easily plan your budget around payments to avoid falling into default.

The amount you borrow will be limited to your property's value. If you have not built enough equity, you will end up with a small amount of money.

You will lose your house if you fail to keep up with payments.

The minimum borrowing amount must be at least E5,000.

The longer repayment period makes payments more affordable, but you will end up paying a lot more interest in total.

Guarantor loans

If you are looking to revamp your house and your credit file is not up to snuff, you might find it hard to qualify for unsecured home improvement loans. In this case, guarantor loans come in handy. A guarantor loan could be approbated because a lender could call in the guarantor to discharge the debt in case of a default. Guarantor loans are particularly popular among subprime borrowers. Here are the advantages and drawbacks of guarantor loans:

A bad credit score will not get in your way because a guarantor reduces the risk of a lender.

You do not need to secure the loan against your house, so there is no fear of losing your property.

You will not be allowed to borrow a large sum of money. The maximum borrowing amount cannot exceed E5,000, depending on your and your guarantor's credit history.

You will need to arrange a guarantor with a good credit rating.

Arranging a guarantor does not mean you can abdicate your responsibility. A lender will not turn to the guarantor until all means to cover money from you have been exhausted.

A default on your loan would strain your relationship with a guarantor. Further, it will be recorded on the credit report of the guarantor, too, even if they have discharged the debt.

Remortgaging

Remortgaging is also a good alternative to raise funds to renovate your house. Remortgaging allows you to borrow extra funds based on the equity you have built in your house. The extra funds you manage to borrow could be employed to carry out home improvement projects.

Remortgaging may sound more affordable than other alternatives but do not forget that it comes with the longest repayment term. It means you will continue to pay interest throughout the mortgage term. Compared to other home improvement alternatives, it will cost you much more money.

The bottom line

While taking out a loan to renovate your house, you must carefully weigh up their advantages and drawbacks. Choose a loan that serves your needs and falls within your budget. It is always recommended that you ameliorate your credit score to avail yourself of lower interest rates. When your overall financial situation is good, a lender will most likely charge affordable rates.