Key takeaways

  • A home improvement loan can provide quick funding and flexible repayment options to homeowners.
  • Home improvement loans may come with higher rates and fees for borrowers with bad credit.
  • It's important to consider alternatives before applying for a home improvement loan.

Home improvement or home renovation loans are a type of personal loan that allow you to use your borrowed funds to finance work around the house. This type of personal loan can fund everything from small renovations to full room remodels.

However, like all loans, home improvement loans have some downsides. For example, if you don’t have stellar credit, it’s likely that you’ll be offered high interest rates and fees if approved. Before applying for one, weigh the pros against the cons to determine if they’re the right fit for you and consider alternatives.

Pros and cons of home improvement loans

Home improvement loans are an essential tool for many people who may not be able to build up their savings. But even if you can score low rates, they may still be risky if you struggle to keep up with payments or borrow too much.

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  • Helps build credit.
  • Finance a large project.
  • Add value to your home.
  • Fixed payments.
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  • Potentially high fees.
  • Potentially high interest rates.
  • Some loans are secured.
  • Negative impact on credit.

Home improvement loan benefits

Home improvement loans are an important tool for homeowners who need to make essential or cosmetic changes to their space. Because they come with fixed interest rates and let you borrow a large lump sum at once, they are a useful way to make the payments more manageable.

Helps build credit

On-time payments will always be a great way to improve your credit score, and can make future borrowing less expensive. In addition, you can build your credit by expanding the types of credit accounts you have.

If you only have a few credit cards, a home improvement loan can diversify your credit profile. Your credit mix makes up 10 percent of your overall FICO credit score, while age and mix make up 20 percent of your VantageScore.

Finance a large project

There are lenders that offer up to $100,000 in personal loan funds. However, this isn’t a common maximum amount, and not everyone will be able to qualify for such a large loan.

But if you have a big project and the income to afford large monthly payments, opting for an unsecured home improvement loan won’t have you running the risk of losing your home if you default, like with a secured home equity loan.

Add value to your home

A home improvement loan can help you increase the value of your home through tackling a more extensive project than you could otherwise save for. What’s more, if you plan to sell your home, you can recoup some of what you spent — and make your home stand out more on the market.

Fixed payments

Home improvement loans are fixed-rate installment loans, meaning you’ll be on the hook for a predetermined monthly payment amount. Installment loans can be the better financing solution for smaller, short-term projects, while longer, more expensive renovations may be better funded with a home equity line of credit (HELOC).

Home improvement loan drawbacks

Home improvement loans aren’t for everyone. Factors like fees, high rates and hard credit pulls can delineate from the overall value of the loan and cause financial stress down the road.

Potentially high fees

Not every lender charges the same fees. Your loan may have an origination fee that either deducts from the total amount you receive or increases the amount you borrow.

Some lenders may also charge late fees and prepayment penalties. While both of these technically can be avoided, a prepayment penalty makes it much more challenging to save money if you’re able to make payments ahead of schedule.

Potentially high interest rates

Home improvement loan Interest rates can be as steep as 36 percent —- especially for those with poor credit. The higher your interest rate is the more you will likely have to spend each month to finance your home projects. Keep these high interest rates in mind when shopping for loans.

Some loans are secured

Most personal loans are unsecured, which means they don’t require collateral. However, some may be secured either by your home’s equity or by another asset, like a savings or investment account.

If you’re unable to pay your loan for a set amount of time and enter into default, the lender could seize your collateral to satisfy the delinquent balance. Even if a secured loan comes with lower rates, the risk potential is much higher and that’s a key factor to consider before signing on the dotted line.

Negative impact on credit

Applying for a home improvement loan will result in a small drop in your credit when the lender does a hard pull. And if you miss any payments, it’s likely that you’ll see that negatively impact your score as well. Even if you make every payment on time, your credit could still be negatively impacted if the loan substantially raises your debt-to-income ratio.

When to get a home improvement loan

Taking out a personal loan for home improvements may make sense in the following scenarios.

  • You need money fast to cover emergency home repairs. Home improvement loans generally have fast fundings speeds, which might make them a better funding option than some alternatives.
  • You’re paying for a one-time home improvement project. If you need to borrow a lump sum of money to cover a project, a personal loan may be a good idea. For ongoing projects, consider a credit card or line of credit.
  • You prefer not to risk losing collateral. A home improvement loan is typically unsecured, so you won’t risk losing an asset, such as your home.

Here’s a breakdown of key differences between a home improvement loan and a few alternative financing options.

Home improvement loans Credit cards HELOCs Home equity loans
Loan amount Up to $100,000 High-limit cards start at $10,000 Varies by lender and the amount of equity you have in your home Varies by lender and the amount of equity you have in your home
Is collateral required? Typically doesn’t require collateral No Yes Yes
Average interest rate Around 11% Around 20% Around 10% Around 9%
Repayment terms Typically 2 to 7 years Generally has a 30-day billing cycle Up to 30 years Up to 30 years
Bankrate tip

The rate you receive, if approved, may be higher or lower than the average rate, depending on your credit score and various other factors.

The bottom line

Carefully consider the potential impact that taking on more debt will have on your financial health. Even before comparing lenders and looking into the details, conduct a financial audit to ensure your credit utilization and debt-to-income ratio can handle more debt.

If a home improvement loan is not the right route for your financial needs, consider alternatives like a home equity loan, HELOC, credit card or taking time to build up your savings.