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It’s the “paper or plastic” of home improvement loans — whether your loan should be secured or unsecured.
Unsecured loans marketed specifically for home improvement are a relatively recent option. Many of the current lenders started making these loans after the home market collapsed nearly a decade ago, leaving many homeowners with less (or negative) equity.
In 2012, Boeing Employees Credit Union noticed that many of its members were low on home equity but still needed home improvement loans to keep up with repairs and maintenance, says Todd Pietzsch, spokesman for the credit union.
Unsecured personal loans don’t require equity as collateral. But healthy credit is a must. If you’re working with a reputable lender, it also will want to see that your income is high enough and your debt load is low enough that you can easily afford those monthly payments. If you’re smart, that’s your goal, too.
If you’re considering an unsecured home improvement loan. Here are 6 points to ponder.
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1. Unsecured loans come in lower dollar amounts.
In general, unsecured personal loans mean smaller dollar amounts. For many lenders, unsecured home improvement loans top out at $20,000 to $25,000. But that’s not always the case.
Lightstream lends as much as $100,000, but it’s not something that happens every day, says Kristin Shuff, the lender’s group vice president of marketing.
2. Loan terms are usually shorter.
While terms vary with the lender, you can find stretches as short as 1 year and as long as 7 years.
And in many cases, the personal loan follows the borrower, not the house. If you sell, you can elect to pay off the loan or keep it.
When you shop, make sure your unsecured loan is truly unsecured. Some lenders offer unsecured home improvement loans but put a lien on the home, says Robert Stroup, vice president of product management for the Boeing Employees Credit Union.
3. They are quick to obtain, often no start-up fees.
A secured home improvement loan is like a 2nd mortgage. Getting one can take “weeks to months,” and you may need a home assessment, says Chris Dervan, senior vice president and consumer lending product manager for PNC Bank.
Unsecured personal loans are based on income, debt load and credit history, so they’re as quick and easy to get as a credit card.
In addition, unlike 2nd mortgages, which can include closing costs and origination fees, many unsecured loans have no set-up costs.
Some lenders will require proof that you own a home. And, like Lightstream, some reserve the right to request proof of the home improvements or repairs financed by the personal loan, Shuff says.
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4. You may pay higher interest rates without collateral.
For a home improvement loan, there’s often a trade-off. Offer up your home as collateral and receive a lower interest rate, or leave your home out of the equation and pay a higher interest rate.
Typically, unsecured home improvement loans are “probably higher than a home equity loan but substantially lower than a credit card,” PNC’s Dervan says.
Another factor to consider: Unlike those home equity loans, interest from an unsecured loan is not likely tax-deductible, Stroup says. But always verify those details with a tax pro before you decide.
5. Unsecured borrowers need good credit.
Want to get an unsecured home improvement loan? If you want to get a large sum, you’ll need good credit. But what qualifies as good will vary.
At the Boeing Employees Credit Union, that typically means a FICO score in the mid-600s or above, Stroup says.
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