Should you take out a personal loan for a home improvement project?

Tackling a home improvement project can be costly but, with competitive rates and terms, a personal loan can give you a house to come home to. (iStock)

Home improvement projects can make a house a home. By updating a bathroom or kitchen, replacing windows, or changing the flooring in the living room, you are putting your signature touch on your home and adding value. 

But these improvements can also come with a high price tag, making it difficult for the average person to pay cash for upgrades to their homes. There are many reasons to take out a personal loan, but this is one of the most popular — and can really come in handy.

What is a personal loan?

A personal loan is financed by a financial institution — a bank, credit union, or online lender and can be used for renovations, repairs, and additions to your home. The loan is repaid in fixed monthly payments over a predetermined period of time. Personal loans are usually unsecured, meaning you don’t need collateral to qualify.

If you have good credit, personal loans generally come with competitive rates and terms, which can be much lower than credit cards. To see what kind of rates you'd qualify for today, just enter your desired loan amount and estimated credit score into Credible's free online tools.


Interest rates can range from as low as 6% up to 36%, according to Experian. For the first quarter of 2020, the interest rate on a typical 24-month personal loan was 9.63%, reported by the Federal Reserve. In comparison, the average credit card interest rate was 16.61%. 

Is it a good idea to take out a personal loan?

Personal loans require no collateral, but they often come with higher interest rates, which can depend, in part, on your credit score. Personal loans offer other benefits:

Quicker financing

It’s often easier and faster to gain financing for a personal loan. You can usually pre-qualify at your bank or credit union or via an online marketplace like Credible. Credible can help you compare multiple personal loan lenders at once to ensure you find the best offers.


Pre-qualifying will give you a good idea of how much you’ll qualify for. It also gives lenders an idea of your creditworthiness when determining the best interest rate. It's always a good idea to comparison shop on sites like Credible to understand how much you qualify for and choose the best option for your particular project.

Shorter repayment terms

Personal loans have fixed terms, usually one to seven years, which can be helpful when budgeting your monthly payments. A shorter-term will also save in interest paid over the term of your loan. Home equity loans, on the other hand, come with longer terms, usually five to 20 years on average. 

To get an idea of the personal loan amount you might qualify for, check out Credible’s personal loan calculator

When deciding which type of loan is best, it’s a good idea to comparison shop on lending sites like Credible. Once you know how much you qualify for, you can choose the best option for your particular project. Keep in mind, too, that some lenders offer discounts to improve the energy efficiency in your home. 


Should I use a personal loan for home improvements?

In mid-August, one in 10 Americans couldn't find work, and many people found themselves strapped for cash. Even so, home projects grew as the COVID-19-induced shelter-at-home orders were put into effect. In a Bank of America poll of 1,054 Americans, more than 70% of individuals confined to their homes during the coronavirus pandemic decided to take on improvement projects. 

Personal loans have no security deposits, are relatively easy to get, and require no collateral. But because of the restrictions with COVID-19, many lenders are clamping down on who gets approved for loans. 

Other options you might consider

Cash-out refinance

Instead of a personal loan, some borrowers may turn to a cash-out refinance for home upgrades. A cash-out refinance is a new loan that replaces your existing mortgage. The payout in cash is the difference between the balance you still owe on your mortgage and the home’s value. That difference is what you can spend on improvements to your home. 

Visit Credible to view refinance rates and get a cash-out refinance.


The only drawbacks are that you must have equity built up in your home to qualify. You’ll likely pay closing costs, and because your home is used as collateral, you do risk the chance of foreclosure if you miss loan payments. 

Not sure if you can qualify? Use an online mortgage refinance calculator to find out. 

0% credit cards

Credit cards with 0% interest are a good option when your renovation projects are smaller–up to $10,000–and you plan to pay back the loan quickly. If your renovations are large, like adding a garage or remodeling your basement, home equity loans make more sense from a tax perspective. Keep in mind that 0% interest on credit cards is often for a limited time only, so you’ll want to pay off your loan before the promotional period ends. 

Visit an online marketplace like Credible to view many zero percent credit card options all in one place. 


Home improvement loans

A secured home improvement loan, which is basically a home equity loan or second mortgage, uses your house as collateral. You can often get a higher loan amount at a fixed interest rate and a long payoff. These loans are also usually tax-deductible. However, because your house is used as collateral, if you default on your loan payments your lender can foreclose on your home.  

There are also unsecured home improvement loans that use no collateral. The interest rates tend to be higher and the loan amounts smaller because of the risk to the lender. Unlike a secured loan, interest on unsecured loans isn't tax-deductible.

Home equity loans and HELOCs

When you apply for a home equity loan, you borrow a portion–usually 80% to 90% at most–of your home’s value. If you don’t have enough equity in your home, a home equity loan is not an option. Although interest rates tend to be lower than with personal loans, loan terms are repaid over a longer period of time, often one to 15 years. So, over the term of your loan, you may actually end up paying more interest than with a shorter-term personal loan that comes with higher interest. How much you qualify for depends on the age of the house, the condition, location, and other factors. 


HELOCs can be drawn upon at any time, much like a credit card, and are repaid over an extended period, usually up to 10 years. During that time, you can use some or all of the borrowed funds. Like a home equity loan, how much money you get comes from the equity in your home. Because you make interest-only payments during the draw period and repay the principal later on, HELOCs can be a good option if you’re planning to sell in the foreseeable future. HELOCs have variable rates that can rise or fall, but they do give you flexibility when you’re not certain what the total cost will be for the remodel or renovation. 

Home equity loans and HELOCs are secured by the equity in your home and can be good options for expensive projects. But if you default on your payments, your lender may foreclose. 

When the roof on your home needs replacing, visit an online marketplace like Credible for all of your loan options. 

And, when you’re ready to turn your house into your dream home, but you aren’t sure how to navigate the process during the coronavirus pandemic, assess your personal financial situation, then turn to Credible for the best personal loans for 2020.