A home improvement loan, also known as a home refurbishment loan, intends to help you carry out renovation projects. Home renovation loans come under two categories – secured and unsecured. Like any other loan, you receive money directly in your account and start paying it down in fixed monthly instalments.
The ramifications of late payments and defaults will eventuate in a credit score loss and accumulated debt into the bargain. The end results will be even worse if you make a default on a secured loan. You will lose the collateral, which is none other than your house.
The most vital question is how you should decide between both types of loans. Generally, you should avoid secured loans as they are subject to a dramatically higher risk than personal loans. Even if you are in the black, you cannot be completely assured about your repayment potential down the line. You may lose your job, or you may face some medical emergency. You will lose your house if you fail to meet your obligations as a result of financial setbacks.
Fortunately, you do not have to bear the risk of losing your property by using personal loans. However, you cannot avoid the adverse implications of non-payment.
Ways to decide whether a home improvement loan is the right choice for you
Here are the ways to decide whether you should consider a loan for revamping your house:
- Interest rates
Never forget that you will be obligated to pay interest in addition to the principal amount. The cost of the debt is calculated by interest and additional charges you pay. Interest rates vary from lender to lender. You should deliberately research the market to ensure you do not end up with an expensive deal.
Bear in mind that interest rates and annual rates are two different things. When comparing deals, you should focus on annual rates as they include interest rates and additional charges. The best way to get hold of an affordable deal is by obtaining prequalifying letters from lenders.
These letters are called preapproval letters, explaining the expected interest rates you will be charged. With a prequalifying approval, you do not have to lose your credit points. However, the actual rates will be so high that you can only learn about them after applying for the loan. They will most likely be slightly higher because a thorough credit report check will be made after you put in a formal request for a loan.
- How much you need to borrow
Another paramount factor is checking how much you need to borrow. A logical and responsible borrowing involves the necessity for adhering to your requirements. Just because your budget has wiggle room does not insinuate that you should borrow extra money. Borrowing money seems tempting, especially when it is conveniently available, but the harsh fact about loans is that they are expensive.
Interest rates levied on you include lenders’ profits. Grabbing the first offer will cost you a fortune, and it will affect your financial circumstances in the long run, too. The implications on your budget will be far-reaching. High interest rates increase the size of your instalment, which results in a smaller budget for your regular expenses.
Chances are you avoid laying aside money for a rainy day. It will wreak havoc on your finances when you are caught unaware of emergencies. In the absence of little or no savings, you will hinge on loans. As a result, you will fall into the cycle of borrowing and eventually find yourself in an abyss of debt.
- Weigh your repaying capacity
Determining how much you need and how much you can repay are two different things. It is likely that you need €5,000 to upgrade your house, but you can afford to repay only £3,000. Of course, it makes sense to borrow less than your requirement.
Online calculators can help you know the estimated figures you will be paying. In reality, the actual cost will always be higher, so you can easily see whether your budget will have the scope to make higher payments.
Financial experts admonish that you avoid owning other debts when taking out a loan to remodel your house. Most lenders will be sceptical about your repaying capacity if you already own a 5000 Euro loan, for example. If they sign off on your application, they will charge high interest rates. This can put a huge burden on your budget.
Though lenders are always responsible for carefully gauging your repaying capacity, nobody knows better than you about your repaying potential. Before you make any borrowing decision, you should carefully analyse your situation.
- Will you be able to manage both loans?
- Are you carrying an alternative plan if your financial situation is not so stable for the specific period?
- Will you be able to continue to stow away money for a rainy day?
It is vital that you carefully take stock of your current and projected financial situation.
- Your overall credit profile
Your credit score is important, but a lender will make the lending decision after evaluating your overall credit picture. For instance, the number of inquiries and late payments in the past, employment stability, a debt-to-income ratio, and collateral.
Do not just rely on your credit score because lenders use their own formula to calculate the risk involved in lending your money. The superior the risk, the higher the interest rate will be.
The final word
A home improvement loan may or may not be a good idea. It largely depends on your repaying capacity. You should always carefully gauge how much money you need and then decide whether you will be able to pay off that much money along with interest. Make sure your regular expenses and savings for emergencies are not compromised because of debt payments.
