- Many people choose to renovate their home as a way to potentially increase their property’s value.
- If you cannot or prefer not to pay in cash upfront, you could consider funding a renovation project by taking out a personal loan.
- Personal loans generally have lower interest rates than credit cards but higher rates than home loans.
- Keep in mind that renovating your property does not necessarily guarantee that your home’s value will go up. Also, not every type of renovation will help bring up the value of your home.
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From large-scale makeover projects to smaller DIY projects, home renovations could increase the overall value of the home by making it more modern or functional. Not only that, but you or your tenants can also enjoy a newly refurbished home.
A personal loan is one way to fund your home renovation project. You should be aware of a personal loan’s features and fees before deciding on which loan is best for you. It is always wise to research different types of loans and compare multiple options before settling on your final choice.
Why use a personal loan for a home renovation?
It’s not uncommon for people to borrow money for a renovation because they don’t have enough cash available. There are several different ways that you can fund a home makeover if you are unable to or prefer not to pay in cash, including personal loans, credit cards and redrawing on your current mortgage. The total project cost will be different depending on how you decide to fund it.
The advantage of taking out a personal loan to complete your home renovation is that personal loans often charge lower interest rates than credit cards, especially if you take out a secured personal loan. This can help keep the long-term costs of borrowing money to a minimum.
Using a personal loan also minimises the time spent paying back the loan, which may mean less total interest paid on the loan. In contrast, when redrawing funds from your home loan to use for a renovation, you could be paying more interest over time, despite the home loan’s lower interest rate. This is because the loan amount will be paid back over your home loan’s term, which is typically much longer than that of a personal loan.
But be aware of the potential costs attached to taking out a personal loan for a home renovation. For starters, personal loans will always charge you interest and some may also charge upfront and/or ongoing fees on top of the interest. Importantly, completing a renovation to your property does not necessarily lead to an uplift to the home’s value.
What are the pros and cons of taking out a personal loan for a home renovation?
- Personal loans generally have lower interest rates than credit cards.
- Some lenders offer features to make the loan more flexible for borrowers, e.g. the ability to make extra repayments.
- Usually borrowers may pay back the loan over a fixed term of typically three to seven years.
- Fees are usually charged to set up and keep the personal loan.
- Personal loans generally charge higher interest rates than home loans.
- Not all personal loans will be flexible and some may charge you fees for paying off the loan early.
- There is a chance your property’s value will not increase despite taking out a personal loan and undertaking a renovation.
What features of a personal loan should I know about?
Finding the right combination of personal loan features could help you secure a loan that is suited to your own personal financial situation.
- Secured personal loan - This is a loan where you offer up an asset as security that the bank will sell if you fail to make the payments on your loan. As there is an added layer of security for the bank, these loans may offer lower interest rates than unsecured personal loans.
- Fixed and variable interest rates - Personal loan interest rates come in both fixed and variable forms. Fixed loans will have one interest rate that keeps your monthly repayment amount steady over the loan term. Variable personal loans generally have a lower interest rate than fixed loans but will be subject to rate rises according to market conditions. The option that will best suit you may depend on if you require your monthly repayment amount to be consistent and how much room there is in your budget for fluctuation.
- Fees - Personal loans will also charge varying fees that you should be aware of before you sign on to the loan. These could include upfront fees as well as ongoing fees. You should ask your prospective lender for a summary of all the costs involved in taking out the loan you are interested in before you commit to anything.
- Extra repayments - Finding a loan that allows you to make extra repayments and pay off the loan early will give you more control over how long you have the loan for and how much you pay in interest by the end of the loan. You will find that the faster you can pay down the loan, the more you will save over time. But some lenders will charge you break fees if you pay off your loan earlier than specified. You can investigate different loan terms and the amount of interest you might need to pay with these loan terms using RateCity’s Personal Loan calculator.
How can I use a personal loan to add value to my home?
Using a personal loan to renovate your property can be a good way to increase its value. By updating a kitchen or adding an outdoor area to your home, you could potentially be boosting your property’s resale value.
It is important to remember that not all home improvements will add value to your home. If this is your primary goal, then you should research what type of renovation could make your home more attractive to buyers. It is generally agreed that a refurbished kitchen or bathroom are most likely to add value to an older property.
Minor home improvements could also bring up the value of your home without being too expensive or disrupting living arrangements of residents. Things like replacing old carpet in bedrooms or adding a fresh lick of paint could help boost the value of your home.
Keep in mind that not every type of renovation will help bring up the value of your home. For example, painting the walls dramatic colours or adding fixtures and fittings that may not be to everyone’s taste could turn away both buyers and tenants.
A financial writer for RateCity, Alison Cheung specialises in housing and real estate. Since 2015, she has written about commercial and residential property for Domain Group and NewsCorp in print and online, and has been published in both Domain and RealEstate.com.au. Alison is passionate about property investment and innovations in the real estate industry, and firmly believes in the most basic yet vital financial advice ever given: saving for a rainy day.
Most lenders will need to you provide the following information in your application for a fast loan:
- Proof of identity
- Proof of residence
- Proof of income
- Details of any assets you own (e.g. car, home etc.)
- Details of any liabilities you owe (other personal loans, credit cards, mortgages etc.)
- How much you want to borrow
- How long you want to pay it back
- Purpose of your loan
The No Interest Loans Scheme (NILS) allows low income borrowers to take out no-interest loans for up to $1500 to purchase essential goods and services.
There are also similar low-interest loan schemes available to borrowers in financial hardship who are having a tough time getting finance approved.
If you’re having trouble being approved for a loan of less than $2000, and urgently need to purchase household essentials, there may be emergency loan options available to you.
For example, the No Interest Loans Scheme (NILS) allows low-income borrowers to take out interest-free loans of up to $1500 for essential goods and services.
For further assistance, consider contacting a financial counsellor, or calling the National Debt Helpline on 1300 007 007
Many personal loans, much like home loans, can be refinanced. This is where you replace your current personal loan with another personal loan, often from another lender and at a lower interest rate. Switching personal loans may let you enjoy more affordable repayments, or useful features and benefits.
If you have a $5000 personal loan as well as other debts, you may be able to use a debt consolidations personal loan to combine these debts into one, potentially saving you money and simplifying your repayments.
It can be hard to improve your credit score, as it usually requires sacrifice and discipline, but hard doesn’t necessarily mean complicated. There are nine steps you can take to improve your credit score, most of which are simple to follow.
As a general rule, the lower your credit score, the more remedies you can apply and the greater the scope for improvement.
A personal loan sits somewhere between a home loan and a credit card loan. Unlike with a credit card, you need to sign a formal contract to access a personal loan. However, the process is easier and faster than taking out a mortgage.
Loan sizes usually range from several hundred dollars to tens of thousands of dollars, while loan terms usually run from one to five years. Personal loans are generally used to consolidate debts, pay emergency bills or fund one-off expenses like holidays.
Much like applying for other personal loans, applying for personal loans for single parents will likely require the following:
- Proof of identity
- Proof of residence
- Proof of income
- Details of assets (e.g. car, home)
- Details of liabilities (e.g. credit cards, other loans)
- Loan amount
- Loan term
When many lenders assess a borrower’s income to determine whether they can afford a loan’s repayments without ending up in financial stress, they may not count Centrelink payments as income for this purpose.
Before applying for an emergency loan, it may be worth contacting a potential lender to find out if they accept applications from borrowers on Centrelink.
If you need to borrow $2000 or less, alternatives to getting a personal loan or payday loan include using a credit card or the redraw facility.
Before you borrow $2000 on a credit card, remember that interest will continue being charged on what you owe until you clear your credit card balance. To minimise your interest, consider prioritising paying off your credit card.
Before you draw down $2000 in extra repayments from your home, car or personal loan using a redraw facility, note that fees and charges may apply, and drawing money from your loan may mean your loan will take longer to repay, costing you more in total interest.
If more than half of your income comes from Centrelink benefits, it may be more difficult to have a $2000 loan application approved. Many lenders will check if you can afford a loan’s repayments on the income from your job before they’ll approve an application, and many won’t count Centrelink payments when assessing your income for this purpose.
Some lenders will offer $2000 loans to borrowers on Centrelink – consider contacting potential lenders to check before applying.