How many times have you opened a personal finance article then clicked away?
Not because you didn’t want to learn, but because the article was filled with vague, unhelpful advice?
We have. Many times.
Shallow articles are frustrating because you’ll need all the help you can get to make smart financial decisions–especially with huge choices like how to pay for your upcoming remodel.
Making the wrong decision can cost you thousands of dollars.
That’s why we’re beginning with a promise:
In just 8 minutes, we’ll teach you what you need to know about personal loans for home improvement.
You’ll learn the answers to these (and more) questions:
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What is a personal loan?
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How are my rates determined?
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When should I use a personal loan for home improvement?
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Where can I find a personal loan?
Let’s start with the most obvious question.
What is a personal loan?
Here’s the “cocktail party” definition: Personal loans, known for their quick approval processes, usually come between $2,000 and $40,000 in total principal amount. You pay them back through fixed monthly payments over 3 to 7 years–all without using any home equity.*
Now there’s a 0.0001% chance you’ll discuss a personal loan at a cocktail party, but a big chance you’ll use a personal loan for your home improvement project (otherwise you wouldn’t be reading this). Therefore, it’s worth going into more depth.
What are the rates on personal loans? And how are they determined?
Personal loans for home improvement have average APRs between 10% and 20%. Of course, some homeowners get lower than 10% while others get higher than 20%. An annual percentage rate (APR) is the yearly cost of getting a loan; it includes both interest and fees.
Which rates will you get? You can never know for sure in advance, but these 4 factors help lenders decide:
1. Your creditworthiness:
Because persona loan lenders can’t foreclose your home, they need assurance that you’ll pay back the loan. Otherwise the lenders can lose money by working with you. That’s why rates are higher than on loans secured by your home equity.
That’s where your credit score comes in. The score, reported as a number between 300 and 850, predicts your ability to pay back a loan.
Homeowners with higher credit scores tend to get better rates. If your credit score is below 580, you won’t be able to get a personal loan. Homeowners with credit scores above 750 often get the best rates, but with a score above 640, you can usually find manageable monthly payments.
2. Your income and employment status:
Lenders need to know whether you can make monthly payments. Your income and employment status help answer the question. A steady job increases the odds you can afford a monthly payment. Your income also tells the lenders whether you make enough to reasonably meet your payment obligations.
3. Your debt-to-income ratio:
Your debt to income ratio is the sum of your monthly debt payments divided by your monthly income. A ratio of around 40% is usually the highest any lender will consider. Consider paying down existing debt before taking out a new loan if your ratio is higher. Homeowners with low ratios tend to get lower rates.
4. Individual lenders’ needs:
APRs change across lenders for two related reasons:
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Different underwriting models: Lenders take the factors above and use them to decide whether to approve you for a loan. Every lender has a different way of weighing each factors.
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Credit score specialization: Some lenders serve borrowers with good credit scores, while others focus on homeowners with not-as-good credit.
Instead of spending the time researching which lender suits your unique financial situation, you can see your rates from multiple providers at once. Getting rates from several lenders means you’ll find a partner whose underwriting model and credit score focus best suits your needs–at the lowest cost.
From APR to monthly payment:
Of course, you care about the APR primarily because it determines how much you’ll pay each month. Hearth contractors can provide a home improvement payment calculator, which lets you experiment with different loan terms (repayment periods) and APRs to see how each factor affects your monthly payment.
There’s more to know about personal loans for home improvement besides their rates.
No home equity means quick funding
You may be considering a loan that requires home equity. If so, prepare to wait 4-6 weeks for approval. Why? These loans are basically second mortgages–and thus require a long application process. You’ll also likely spend $300 – $600 on a home appraisal, and may also have hefty closing costs.
Personal loans for home improvement are not second mortgages.
No equity requirement means you can get a personal loan for your remodel as soon as a day after you apply and are approved.
Fixed monthly payments, explained
National interest rates could change 10 times while you have the loan. But the changes to your monthly payments? None. With the government’s benchmark rate near a record low, interest rate changes would likely only increase your debt burden if you didn’t have a fixed-rate loan. (Alternatively, if rates were higher and could fall by a lot in the future, then a fixed-rate personal loan would become less attractive).
What about fees?
Personal loan providers usually do not charge a prepayment penalty. In that case, if you decide to pay back your loan ahead of schedule, you won’t have to pay extra. Prepayment loans on other financing options range from a couple hundred to several thousand dollars.
Depending on the lender, you might pay a one-time origination fee between 2-5%, which is deducted from your loan when the lender transfers the funds. Personal loans also usually have late fees if you miss a monthly payment, but amounts vary by lender.
This article gets more fun from here…we promise!
When should you use a personal loan for home improvement?
Ok, you now know a lot about personal loans and how they work. But when should you get one?
You’ll come across personal loan advertisements that say something like this:
“Get your dream kitchen for as low as $300 a month.”*
These ads brand personal loans as a great solution for your dream remodel. Simply get a personal loan, snap your fingers, and voila–you got a new kitchen for a great price.
Sure the ads have nice photos, but because you’re a smart homeowner, you know better.
Here’s the real story: personal loans for home improvement tend to be best if you don’t have much home equity and don’t have time to save cash for your project.
What if you’ve always wanted to remodel your bathroom, but don’t have any time constraints? You should consider waiting and saving cash. Practicing patience will cost you the least money, and you won’t have to worry about making payments.
But what if a pipe burst and now your bathroom is ruined?
Unless you want to use your backyard hose to shower, you need to fix that bathroom sooner rather than later! Waiting to save cash is a luxury you simply can’t afford.
Now, it’s a good idea to consider a personal loan. Here’s why:
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You’ll start your project quickly: Using a personal loan as your home repair financing option lets you get going quickly. As we discussed in the previous section, personal loan providers offer rapid approval. The promise of a rapid down payment could also incentivize your contractor to give you a lower bid.
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You’ll probably pay lower rates than you would through a credit card: Thinking of loading that $18,000 bathroom repair on a credit card? According to the Federal Reserve, credit card rates can be over 2% higher than those on personal loans. That’s a $360 difference. If your project were $40,000, you’d pay $800 more.
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Your contractor likely won’t charge you a fee: Your contractor could charge you a processing fee up to 5% of your project if you use a credit card. With a personal loan, you can cut a check straight from your bank account and avoid the fee.
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You won’t overspend: When addressing an urgent project, you need to beware of too much “scope creep”. Starting one project can lead you to start another. Sometimes this is a good idea; your contractor may give you a discount for bundling projects together. But beyond a certain point, you should wait and save cash. Personal loans fund you upfront, preventing too much “scope creep”.
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You can prepay your loan without a fee: If you get extra cash and decide to pay back your loan early, you can do so without paying an extra cent.
Personal loans become an even better option if you don’t have much home equity. With lower-rate options like a home equity line of credit off the table, personal loans can be the best option you’ll find.
If you want to learn more about financing projects through a personal loan, then you’ll want to check out these project-specific pages:
Revisiting the ad at the beginning of the section, this version sounds better:
“Fix your kitchen now for as low as $300 a month.”
Before deciding how to pay for your remodel, you should carefully evaluate every financing option.
How do you find a personal loan?
If a personal loan is the right fit, then Hearth can help you find a great deal. In just 60 seconds, you can see personalized rates from multiple lending partners without affecting your credit score. Shopping around through Hearth will help you find the right loan for your project–and your bank account.
Once you’ve found the right option, it’s easy to continue on with your application. You’ll need identification, proof of income (e.g. a W-2), your employment history, and about 10-15 more minutes.
The provider you picked will then quickly get you a decision: approval, rejection, or a request for more information. Note that applying for a personal loan will affect your credit score.
Conclusion
At the beginning of this article, we made you a promise. We told you that we’d teach you everything you need to know about personal loans for home improvement.
We worked hard to fulfill that promise.
But if you feel we came up short somewhere, we want to know how we can do better. Feel free to send us a note at [email protected] with any questions you have that we didn’t address. We’ll be sure to get back to you and update this article so other readers can learn.
*As an example, a $10,000 loan with an APR of 14.50% and a term of 36 months would have a monthly payment of $344.21. Actual APRs will depend on factors like credit score, loan amount, loan term, and credit history. Only borrowers with excellent credit will qualify for the lowest APRs. All loans are subject to credit review and approval.
All loan information is presented without warranty, and estimated APR and other terms are not binding. Hearth’s lending partners generally present a range of APRs (for instance, from 5% to 35.99%) with a range of terms and monthly payments.
Hearth is a technology company, which is licensed as a broker as may be required by state law. NMLS ID# 1628533 | NMLS Consumer Access. Hearth does not accept applications for credit, does not make loans, and does not make credit decisions; this site does not constitute an offer or solicitation to lend. All insurance services are provided by Hearth Home Insurance Solutions, Inc. Hearth may be compensated by third-party advertisers.
