Home improvement loans are personal loans aimed at remodelling your house. Renovation makes a building accommodating, but people generally intent to refurbish their houses to elevate the market value of their property. Unfortunately, several kinds of renovation projects do not mushroom the property value.
Well, sometimes, the risk of physical injury acts as a catalyst for home renovation. Several residential properties seem to have seen better days. Damaged facelifts, leaky rooftops and other structural issues are ubiquitous across Ireland. So, it is likely that you are reliant on these loans to make your house habitable and sustainable.
Home refurbishment loans could be secured from banks, direct lenders and credit unions. However, traditional financial institutions come in handy when you need a large amount of money. Those who have a mortgage on their houses could apply for these loans based on the equity they have built. Lenders generally lend up to 80% of the built equity. Secured home improvement loans are more affordable than personal loans as they charge low interest rates.
Ideal though they are for specific projects, they are not suitable to carry out all kinds of renovations and come with serious risks. In case you are choosing home improvement loans with poor credit, they will cost you hefty interest. These loans are not the best options for everyone. Here is why:
- They charge high fees
Personal loans are more expensive than secured home renovation loans as they carry high interest rates. Interest rates will be higher if your credit score is not up to scratch. The main reason for these loans being expensive is that they are not secured. A lender does not have any collateral to liquidate and cover their money back. They charge high interest rates to mitigate their losses in case of default.
Along with interest, they charge processing fees and additional charges. There would be various types of fees. Loan origination fees are charged at the time of applying for the loan, and exit fees are charged at the end of the contract. They are both one-off costs. In addition, there could be some monthly charges. The annual percentage rate you are quoted is an assortment of interest rates and fees, and the bifurcation of fees will be disclosed in the agreement. It is vital to read the fine print so you know how much it will cost you.
Annual rates vary by lender as it depends on how risky a borrower you are perceived. However, most of the lenders charge high rates because of high fees. Pay heed to the annual percentage rate rather than interest rates when making a decision.
If you are a borrower with a bad credit rating, interest rates and fees will be much higher. Interest rates of home renovation loans could be as high as 40%. You should try to look elsewhere if you are charged 35% or more.
- They could be secured against your house
Home renovation loans are unsecured only to a certain limit. The maximum amount you could potentially borrow without collateral to renovate your house is not beyond €10,000. However, most lenders cap on €5,000. If you want to borrow more than that, you will have to secure it against your house. Secured loans could assist you with securing lower interest rates, but there is a risk of losing your house in case of default.
Usually, secured loans come with a long repayment period. As a result, the size of your monthly instalments whittles down, but this costs you a lot more interest in total. As the repayment term is longer for these loans, chances are you fall behind on payments because of a change in your financial circumstances. Once you fall behind on the payment, interest penalties and late payment fees will be added. This will add up the cost of the debt.
- Negative impact on your credit rating
Applying for a home improvement loan could have a negative impact on your credit score. As these loans involve a hard credit check, you will experience a sudden drop in your credit points. If your credit score is already bad, it will become worse. Chances are you will fall under the range of "very poor credit rating: borrower. However, this is a temporary drop in your account, which will be revived as soon as you start making payments. After a couple of payments on time, you will see your credit score heal.
But if you miss a payment, you will lose your credit points. Lenders are obligated to inform credit reference agencies of your missed payments. If you miss a payment, you could preclude them from reporting it to credit bureaus by paying it off within 30 days, but you cannot avoid late payment fees and interest charges.
Your credit score will start ruining if you miss another payment, and if you miss three payments in a row, your account will go into default. Not only will you see your credit rating impaired, but you will also struggle to apply for a loan at lower interest rates down the line.
Consequences could be severe if you do not cooperate with collection agencies. They have the power to take you to court. Once a CCJ is issued against you, your credit score will immediately fall into the category of very poor. This will remove all your chances of applying for a loan down the track. No lender would even sign off on an application for a small emergency loan, such as a payday loan if your credit application is very poor.
When should you use personal loans to improve your house?
Here is when a home improvement loan could prove to be an ideal option for you:
- You need money to fund the gap in your savings to complete home renovation.
- You are completely certain that you would not struggle to repay the debt.
- You are not using a secured home improvement loan.
- If you need a large amount of money, make sure that you will make payments on time and not be on the verge of losing your house.
Home renovation loans are generally not recommended if:
- Your credit rating is not stellar, and you should avoid using these loans.
- You need money to meet recurring renovation projects. Rely on credit cards or lines of credit, then.
- You have not built sufficient equity in your house. Using these loans with an outstanding mortgage could be a bit complicated, so avoid borrowing money against your equity.
- You have no idea how much money you would actually need to complete the project, and you are not certain about your repaying capacity.
The bottom line
Home improvement loans might not be the perfect solution for everyone. You should use these loans only to meet one-off renovation projects and when you are completely sure about your repaying capacity.
It is always recommended that you stash away money for home renovation because savings could prevent you from paying interest. As far as bridging a gap is concerned, credit cards or lines of credit could come in handy. They are more affordable than home improvement loans.
