Personal Loans for Home Improvement

Lauren WardUpdated April 21, 2023

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Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.

Improving your home can be a wise investment, especially if it makes your home safer, boosts its energy efficiency, or increases its value. If you don’t have the cash on hand to pay for these improvements, a home improvement personal loan can help.Before taking out a home improvement loan, it’s important that borrowers understand the details of the loan they are signing up for so they can choose the best home improvement loan for them and their credit profile.

Can You Use a Personal Loan for Home Improvement?

You can use a personal loan to finance home improvement projects, such as the following:

A home improvement personal loan can help you pay for home improvement projects. Of course, there are some pros and cons of personal loans, but understanding the terms of the loan agreement can help avert the unexpected and allow you to budget accordingly. Recommended: Guide to Getting a $75,000 Personal Loan

What Can a Home Improvement Personal Loan Be Used for?

A home improvement personal loan can be used for many things, so the list of what you can use it for is quite long. Common renovations and repairs homeowners use home improvement loans for are:

Replacing or repairing flooring
Installing energy efficient windows
Converting attic space
Financing basement renovations
Replacing your gas vs. electric stove
Replacing or upgrading HVAC systems
Repairing or replacing roofs
Adding a second bathroom
Installing or replacing a septic system
Building a new deck
Renovating a garage

There are, however, things you can’t use a personal loan for. These usually include business expenses, college tuition, and down payments for homes, but it all depends on the lender and the loan product.Recommended: Transform Your Garage Into a Stylish Man Cave

Pros and Cons of Personal Loans for Home Improvement

Taking on debt in the form of a personal loan may not be the right choice for every person or in every financial situation. It’s generally not a good idea to add to your existing debt if you’re having trouble paying for the debt you already have or you don’t think your budget will handle another expense. If you are financially able to afford to repay a personal loan for home improvement, you may want to consider how quickly you need the funds, how much money will your project require, and other details. Here are some pros and cons to think about:

Pros of Home Improvement Loans

Quick processing time. Borrowers are often able to receive loan proceeds shortly after approval.
No fees, in some cases. Some personal loan lenders don’t charge origination fees, prepayment penalties, or other related charges.
Fixed monthly payments. Personal loans are typically fixed-rate loans, so each monthly payment is the same for the entirety of the loan’s term.
No collateral needed. If your loan is an unsecured personal loan, you will not have to put up collateral you may risk losing if you don’t repay the loan.

Recommended: Guide to Unsecured Home Improvement Loans

Cons of Home Improvement Loans

Comparatively small loan amounts. Maximum loan amounts for personal loans may be smaller than the maximum home equity loan amount. You may want to consider borrowing a little extra in case your home improvement project costs more than you estimated.
Potentially high interest rates. Depending on your credit score and credit history, it’s possible to receive an interest rate that is even higher than what many credit cards charge.
Fixed rate. While having a fixed rate is often considered a benefit, it can be a drawback compared to a variable-rate loan. If the benchmark interest rate drops, you would not be able to take advantage of a potentially lower interest rate without refinancing.
Lack of tax benefits: Personal loans used for home improvement are not eligible for the potential tax deduction that a home equity loan or line of credit might be.

Typical Repayment Terms for a Home Improvement Loan

It’s important to read the loan agreement carefully so you fully understand what your responsibility is related to repaying a loan. Repayment terms will vary by lender, but personal loans for home improvement, or any other use, generally have repayment periods as short as one year or as long as seven years (84 months). While a smaller repayment period may mean higher monthly payments, it may also mean less interest paid over the term of the loan. Let’s say you borrow $50,000 at 6% interest. If you opt for a five-year repayment term, your monthly payments would be $967 a month (not including fees), and you would pay nearly $8,000 in interest. When the loan is paid in full, you would have paid your lender about $58,000 to borrow $50,000.A loan of the same amount and interest rate, but with a longer term, may have a more manageable monthly payment, but cost more in the long run. If you take seven years to repay the same $50,000 loan at 6% interest, you would have a smaller monthly payment of about $730, but the overall interest amount paid would be much larger, at over $11,000. That $50,000 loan may end up costing more than $61,000 over the life of the loan.

How Much Can You Borrow?

How much funding you can expect to receive with a personal home improvement loan will depend on several factors, including:

Monthly income
Debt-to-income ratio
Credit score
Credit history
Current home value
Mortgage principal
Loan purpose

If you find your income or credit score is holding you back, you may consider applying for a personal loan with a cosigner. This strategy may help you get approved if you’re unable to based on your own creditworthiness.Recommended: How Much Does It Really Cost to Remodel a House?

Other Options for Paying for Home Improvement Projects

Selecting funding for home repair or remodeling doesn’t usually come down to home improvement loan vs. personal loan. There are other options that you can use to pay for home improvement costs.

Low- or no-interest credit card. Some people may opt to use a credit card that offers a low annual percentage rate or even 0% introductory APR. Typically, a strong credit score and credit history are needed to qualify for this promotional offer, which may last between 15 and 21 months.
Home equity loan. If you have equity in your home, you may be able to borrow against a percentage of it, typically up to 85% of any equity you’ve accumulated. For example, if you have $100,000 in equity, you could potentially borrow up to $85,000. The loan proceeds are distributed in one lump sum. Loan repayment terms vary with each lender, but it’s possible to get a repayment term of up to 30 years.
Home equity line of credit (HELOC). A revolving line of credit, a HELOC is another type of loan that allows you to borrow against your home equity. The main difference between a HELOC and a home equity loan is how the loan proceeds are distributed. Instead of the borrower receiving a lump sum, the funds from a HELOC can be borrowed as they are needed and repaid — up to the credit limit — during the draw period, which can last up to about 10 years. When the draw period ends, the repayment period begins, which can be as many as 30 years. Loan terms will, of course, vary by lender.
FHA Title 1 Loan. Insured by the Federal Housing Administration, an FHA loan can be issued by any approved bank or lender. The only catch with an FHA Title 1 loan is that the upgrade must be permanent and it can’t be for a luxury item. This means it won’t cover the purchase and installation of a pool or spa, but it will help with things like adding a second bathroom or repairing your home’s electrical system.

Applying for a Fixed Rate Personal Loan for Home Improvement

A home is an investment and, like all investments, it requires some attention to make it work for you. Keeping your home in good shape may involve repairs and other improvements over the years, and a home improvement personal loan can help you pay for those expenses.At Lantern by SoFi, applying for online personal loans is an easy process. Just fill out one simple form and compare offers from lenders in our marketplace.Compare personal loan rates and apply in minutes.

Photo credit: iStock/monkeybusinessimages

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About the Author

Lauren Ward

Lauren Ward is a personal finance expert with nearly a decade of experience writing online content. Her work has appeared on websites such as MSN, Time, and Bankrate. Lauren writes on a variety of personal finance topics for SoFi, including credit and banking.

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