Personal Loan vs. Home Improvement Loan: What's the Difference?

You can use a personal loan for home improvements, but you also have other options

There are different ways to pay for home renovations or repairs, including a home improvement loan. In many cases, the home improvement loans you'll see advertised are a type of personal loan. However, home-related costs can also be covered by other types of loans. Here is what you need to know.

Key Takeaways

  • A personal loan can be used for many different purposes, including home improvements.
  • Personal loans are generally unsecured, meaning that you don't have to put up your home, or any other assets, as collateral.
  • Other types of loans are also available, including home equity loans, home equity lines of credit (HELOCs), and cash-out refinances. They are all secured by your home.
  • If you're looking for money for a home project, it's worth comparing all of these options.

What Is a Personal Loan vs. a Home Improvement Loan?

A personal loan is a type of installment loan. You borrow a certain sum of money that you then pay back, with interest, over a period of time. Personal loans can be used for a variety of purposes, including home improvements.

The home improvement loans advertised by lenders are often personal loans for the specific purpose of funding home repairs or upgrades. However, home projects can also be financed with other types of loans, such as home equity loans, home equity lines of credit (HELOCs), and cash-out refinances.

How Personal Loans Work

Most personal loans are unsecured. meaning that the lender doesn't require any collateral to back up the loan. However, some lenders might require collateral of some sort if you need a large amount of money or if you have less-than-stellar credit.

Personal loans generally offer fast approval (or rejection) and often have fixed interest rates. If you have a relatively small home improvement project in mind, a personal loan might be your best option.

Here are some of the pros and cons:

Pros and Cons of Unsecured Personal Loans

  • No collateral needed: In most cases, you don't need collateral to secure a personal loan.

  • Fast funding: You can usually receive same-day approval for a personal loan, with the funds deposited in your account as soon as the next business day.

  • Fixed interest rate: Many personal loans have a fixed rate for the term of the loan, making payments predictable and not subject to increases.

  • Higher interest rates: An unsecured personal loan may come with a higher interest rate than a secured loan.

  • Tight credit requirements: You will most likely need to have good credit to qualify for the best terms.

  • High fees and penalties: Some personal loans come with high origination fees and might have penalties that add to the cost.

How Home Improvement Loans Work

As mentioned, loans for home improvement can come in a variety of forms. In some cases, it will simply be an unsecured personal loan that you take out to pay for renovations or repairs.

However, it could also be a loan secured by your equity in the home. If you use your home as collateral, you might get a lower interest rate or larger loan, but you're also taking the risk that it could be foreclosed on if you can't make your payments.

Home equity loans and lines of credit are also secured by your home, as are cash-out refinancing loans.

While failing to make payments on an unsecured personal loan might not cost you your home, there are other serious financial consequences.

If you need a large amount of money to complete a home renovation project, it might make more sense to get a secured loan instead of relying on an unsecured personal loan.

Of course, secured loans also have their pros and cons:

Pros and Cons of Secured Home Loans

  • Lower interest rates: If you choose a secured loan, you might be able to get a lower interest rate because the lender is taking less risk.

  • Higher loan amounts: Secured loans often come with larger loan amounts, which can allow you to tackle bigger projects—or a series of projects without having to take out a new loan each time.

  • Longer loan term: A secured loan often has a longer repayment term, potentially lowering your monthly payments, although you may pay more in total over the course of the loan.

  • Risk of losing your home: If you offer your home as collateral for a loan, you could lose it if you default.

  • Longer application process: When you apply for a secured loan for home improvements, you will usually need an appraisal, and possibly other documents, with means it could be weeks before you get funding.

  • Closing costs: A secured home improvement loan usually comes with closing costs similar to what you would see with a mortgage, increasing the overall cost of the loan.

Alternatives to Personal Loans for Home Improvement

While an unsecured personal loan can be used for home improvements, it's not always the best option. Here are some of the alternatives to consider:

  • Home equity loan: Normally, this type of loan will provide a lump sum based on how much equity is available in your home. If you have a sufficient amount of equity, you can usually borrow more money than you could with a personal loan. This can be helpful if you plan to make major renovations.
  • Home equity line of credit (HELOC): This is a type of home equity loan that, rather than a one-time lump sum, provides a revolving line of credit that you can draw on as needed. It's a good choice when you're not sure how much you'll need for home improvements.
  • Cash-out refinance: In a cash-out refinance, you take out a new mortgage for more money than you currently owe. You use the new mortgage to pay off the old one, leaving you with cash for other purposes. That cash isn't free, of course; it will add to the amount you owe and have to pay interest on. But this can be another way to get a large lump sum for home improvements.

Note than none of these types of loans has to be used for home-related purposes. Many people use them to pay college tuition bills, pay down high interest credit card debts, and so forth.

Is It Easier to Get a Personal Loan or a Home Equity Loan?

If you have good credit, it might be easier and faster to get an unsecured personal loan for home improvements. However, if you have only fair credit, it could be easier to get a secured loan, like a home equity loan, even though it's likely to take longer to receive the money.

Can Personal Loans Be Used for New Construction?

Personal loans have a variety of potential uses, including construction. However, depending on how much money you need, it might be difficult to get an unsecured personal loan for a sufficient amount. There are also construction loans specifically for that purpose.

Do Personal Loans Look Bad to Lenders?

Having personal loan debt doesn't necessarily look bad to lenders. If you have a personal loan and make your payments on time, lenders are likely to see that as a positive. Your credit score may benefit, as well.

The Bottom Line

Making home improvements or repairs can often be expensive, requiring more cash than most of us have on hand. A loan can help you cover those costs, and you have several different kinds to choose from, depending on your needs.

Article Sources
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  1. Consumer Financial Protection Bureau. "What Is a Personal Installment Loan?"

  2. National Credit Union Administration. "Personal Loans: Secured vs. Unsecured."

  3. Consumer Financial Protection Bureau. “What You Should Know About Home Equity Lines of Credit (HELOC): Borrowing from the Value of Your Home,” Pages 2–3.

  4. Experian. "How Does a Personal Loan Affect Your Credit Score?"

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