Renovating a home is an expensive affair. Some homeowners have the cash to pay for it up front, while a major portion of the homeowners does not have sufficient savings for an upfront payment. But the good news is, you do not need to have cash lying around for improving your home. You can opt for a home improvement loan to finance your renovation. This is one of the most popular ways of financing home improvements.
Let us dig deeper to find out more about home improvement loans to understand the concept with much better clarity.
What is a home improvement loan?
A home improvement loan is a personal loan that you can borrow to fund your home improvements. You will have access to funds that can be used in cash to pay for all your expenses. The best thing about it is you do not have to repay it in a lump sum. You can spread the cost of repayments over several months to ease financial stress.
Are home improvement loans worth it?
Home improvement loans are worth it if you plan your expenses. Before you consider hiring someone to start the work – plan your expenses. List out all the areas that you are targeting for home improvement. Categorize them into 2 different parts – most essential and least essential. For example, eco-friendly homes are gaining huge popularity. 14% of homeowners in the UK made their homes more eco-friendly in 2019. Recently Green Homes Grant was announced. A total grant of £2 billion for energy-efficient home renovation. Households can apply for a voucher worth £10,000 for making their homes green.
So, even if you do not have plans for an extensive home renovation, you can take out short-term home improvement loans to support your plan. Later on, you can repay it to the lender once you get the voucher that you have claimed.
How to apply for a short-term home improvement loan?
Before applying for a personal loan, calculate the amount that you need. A thorough assessment of your property and the renovations you are planning to carry out is important. It helps to keep you stay well within your budget. 25% of homeowners in the UK have stated this as a challenge. They often go above their budget, which later on creates financial troubles for them. If it sums up to, suppose say, £5000 – then you will need a short-term home improvement loan.
Compare the market for different loan offers from multiple lenders to find the one that suits your needs. Without comparing loans, you may not get the best loan option as you are likely to miss the other available offers.
What is the interest rate on a home improvement loan?
Whether you borrow a short-term home improvement loan or a long-term one – you will need to pay the interest on it. Different lenders have different lending criteria, and therefore, the interest rate will vary. The interest rates that you will be offered on the loan depends on various factors.
Listed below are some of the major factors that are taken into consideration by the lenders while deciding the rate of interest.
1. Credit score
Your credit score plays a dominant role in the interest rate that you may be offered. The higher your score, the lower will be the interest rates. The lower your score, the chance of getting a loan at favorable terms decreases.
2. Debt-to-income ratio
Many lenders also check the debts that you have against your monthly income to have an estimation of your affordability. Although it may not be up on your credit report, still some of the lenders assess this criterion before deciding the interest rate.
3. Loan amount
Your interest rate also depends on the loan amount that you are borrowing. If the loan amount that you have applied for a huge and you are in no position to offer any collateral, then the rate of interest will be high. As the risk of lending money to you is high.
4. Loan term
Most short-term loans have higher interest rates as compared to long-term loans. Hence, if you are taking out a short-term loan for 12 months, the rate of interest will be high as compared to a loan that you may take out for 3 years.
The bottom line
Improving your home needs your financial commitment as well as arduous planning and estimation. Design, style, structure, interiors will keep changing with time. Redoing your home according to the current trends will help you increase the overall value of your property. Choose your improvements wisely and plan out the finance. Borrowing a loan is not a financial hazard – not repaying it one time is. Therefore, ensure that you pay on time and in full. Doing so will also increase your credit score.