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When Is A Home Improvement Loan A Good Idea?

Allyson Brooks

Home improvements are an excellent way to increase the value of your home in order to sell it above market price. The two main ways to fund these renovations, personal loans and home equity loans, allow you to borrow money for the upgrade.

You may not even need to take out any type of loan to obtain the funds you need. A few ways exist to make these renovations without incurring debt. Based on your financial and construction needs, you can determine whether a home improvement loan is a good idea.

1. Cash

If you have planned a renovation with a mock budget and know what the end total looks like, a good first step is to evaluate whether it's feasible to fund with cash. Creating this budget will not only help you pinpoint your expenses, but if you end up going with a loan, it will be an integral step in showing lenders that you’re prepared for the renovations.

Also, it helps to have a list of what you need before leaving for the local Home Depot (NYSE: HD).

If you find that your project is fundable with cash, you can forgo paying the loan back with interest. This will ensure that you avoid a financial situation you’re unprepared to handle. You should also evaluate whether you are willing to take on any debt when considering cash as an option.

2. Credit Cards

If you can qualify for a 0% APR on a new card based on your credit score, and can plan on paying off the entire project in about 18 months, financing a renovation on a credit card could be a good move for you. This is a great option to get a low interest rate on an unsecured method of payment.

If you choose to take this direction, make sure you’re paying attention to the terms and regulations of your card and that you can abide by them when it comes to paying off the charges. When assessing your financial situation, note the time period in which you want to pay off your renovation expenses.

Selecting this option could mean qualifying for a very low interest rate, expect repayment that's faster than a traditional home improvement loan. If you choose to finance using credit cards, consider the speed with which you can make the payments for your project.

What If You Need A Loan? 

If financing with cash or credit cards don't sound like the options for you, a home improvement loan is probably the right choice.

From here, you need to decide whether a personal or home equity loan is a good fit for your project. The following are a few questions that could help determine the direction in which you might want to go:

  • Is your home renovation project large?
  • Do you have significant equity in your home?
  • Will you need more than $50,000?

Do you want a lower interest rate with a longer payment timeline?

... If you answered “yes” to these questions, a home equity loan may be the direction you want to take.

  • Are you a new homeowner with very little equity in your home?
  • Is your project on the smaller side?
  • Do you have a great credit score?

Are you looking to pay off your debt in a shorter period of time?

... If you answered “yes” to these questions, a personal loan may be the direction you want to take.

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