Home improvement loans are a type of personal loan that are used to pay for home improvement costs. Personal loans are lump-sum, fixed-rate loans that are repaid in monthly installments over a set period of time.
Since personal loans typically don’t require collateral, they can be an alluring alternative for homeowners who don’t want to put their home on the line with a home equity loan or home equity line of credit (HELOC). However, secured personal loans also exist, and they may be an affordable alternative for borrowers with fair or bad credit.
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Financing your home remodel could be as simple as applying for a personal loan. Each lender has their own unique application process, but you’ll typically have to verify your personal information and income.
A home improvement loan works like a traditional personal loan. If a lender approves you for a loan, it will deposit a lump sum of money into your bank account and you’ll repay it in monthly installments over a predetermined period of time. Since these are typically unsecured loans, you won’t need to provide collateral.
In general, a good debt-to-income ratio — your income versus the amount of debt you have — is below 43%, though many lenders prefer a DTI lower than 35%. Since home improvement loans are generally unsecured, lenders will heavily weigh your debt-to-income ratio and credit score to determine how likely you are to repay a loan.
The type of loan that’s best for you depends on a variety of factors, including your credit score, your budget and the amount of home equity you’ve built. If you have a lot of equity in your home, a home equity loan or HELOC may be a good fit since they commonly come with low interest rates. If you have a high credit score, a home improvement loan may be best since you can qualify for a lower APR and your home won’t be used as collateral.