Published in: Personal Loans | Sept. 27, 2019
Pros and Cons of Using Personal Loans for Home Upgrades
By: Christy Bieber
Thinking of getting a personal loan to help you pay for home improvement? Be sure to consider both the good and the bad first.
Upgrading your home can make it more livable and functional for your family. It can also sometimes be necessary to keep pace with upgrades your neighbors are making, or to ensure your home remains safe and structurally sound. And it can even help to improve the value of your home if you want to sell it more quickly or make more cash.
Unfortunately, home upgrades can also be expensive and many people can't afford to pay for them outright. If you want to make improvements and can't afford to pay for them in cash, you'll need to consider all your options for borrowing.
Personal loans are one of those options and they can be good, but using a personal loan to improve your home can have disadvantages as well. Let's take a look at the pros and cons of using personal loans to pay for home upgrades so you can make a more informed choice about whether they are the right way for you to borrow.
Pros of personal loans for home upgrades
Here are some of the biggest benefits of using personal loans for home upgrades:
- The interest rate is lower than on many other types of debt. Personal loans tend to have lower interest rates than credit cards or payday loans. If you need to buy something to upgrade your home that you'd otherwise stick on a credit card, a personal loan can be a cheaper way to borrow.
- You can usually get funding pretty quickly. Most personal loans fund within a week or two, and some lenders even promise access to money within a few days. Mortgage refinancing, second mortgages, home equity loans, or home equity lines of credit, on the other hand, can take weeks or even months to close. So, while tapping into the equity of your home is an alternative to a personal loan, borrowing this way may hold up your home improvement project for a long time.
- Applying for a personal loan is quick and easy. In most cases, you can complete the entire application process online and get approved within a few minutes, hours, or days, depending on the lender. And while you may have to provide some basic financial information, the loan application process tends to be far less cumbersome and much faster than some of the alternatives.
- Many personal loans don't charge up-front fees. While some personal loan lenders charge application or origination fees, many don't. Mortgage loans and home equity loans, on the other hand, often do charge fees and closing costs that can initially make your loan much more expensive.
- Most personal loans are unsecured. This means you don't have to use any assets as collateral and put those assets at risk of being easily taken by your lender if you don't pay. By contrast, borrowing against the equity in your home means your lender could foreclose if you miss payments. You're putting your home at great risk with a home equity loan whereas you don't take on this kind of risk with a personal loan.
Cons of personal loans for home upgrades
There are also some definite downsides to consider when it comes to using a personal loan for home improvements.
- Interest may be higher than if you tap into home equity. If you take out a second mortgage, cash-out refinance loan, home equity loan, or home equity line of credit, it's possible that you could get an even lower interest rate than with a personal loan. This could make borrowing cost less over time.
- You can't deduct interest. Interest from mortgages and home equity loans is deductible if you itemize and meet other requirements, such as keeping your combined mortgage balances below $750,000 and using the money you borrow to improve the home that’s acting as collateral. Personal loan interest, on the other hand, can't ever be deducted from your taxable income.
- You're paying interest on home improvements that may not provide a great ROI. With most home improvements, your return on investment isn't necessarily the best because you get back only a portion of what you spend. Whenever you borrow to fund home upgrades, the interest you pay on your loan actually makes your improvements cost more and lowers your ROI further. This is why paying cash for home upgrades is often a better idea if you can afford to do so.
Should you take out a personal loan for home upgrades?
Before you borrow any money, whether via a personal loan, a mortgage, a home equity loan, or even using credit cards, it's always important to compare your borrowing options and to understand the total cost of borrowing. That way you can make a more informed choice about what is the best loan for you or whether you should look into other solutions to cover the costs of upgrading your home.
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