How a personal loan for a home renovation works
Personal loans are typically paid out in a single lump sum payment, and you begin making monthly installments within weeks of fund distribution. There's more to consider than interest rates as you loan shop, though. It's also important to factor in how much loan fees might set you back. Besides interest, some lenders charge:
Pros and cons of personal loans
Personal loans may be helpful, but they're not perfect. Here are a few pros and cons of taking out a personal loan to renovate your property.
Pros
- You have the funds required to bring your home up to date.
- The improvements may help build equity in your home.
- A renovation can increase your enjoyment of the property.
Cons
- Taking out a personal loan to renovate your home means assuming responsibility for a new debt you may not feel ready for.
- Depending on your credit score, you may pay more interest on a loan than you're comfortable paying.
- Once you take out a loan for home renovations, you may feel compelled to complete all the work quickly.
Getting a low-interest renovation loan
As mentioned, personal loans are available from banks, credit unions, and online lenders. The application process is straightforward (and spelled out in more detail below). One thing to keep in mind is that the lowest interest rates are typically reserved for those with good to excellent credit scores. If your score is not quite as high as you would like, you may want to try boosting it before applying for a loan.
Waiting to apply for a remodel loan can be in your best interest in several ways. Not only does it give you time to improve your credit, but it also gives you more time to determine what exactly you'd like done in your kitchen or other room and help reduce your stress.
If your credit is already high enough to score a low interest rate, take time to shop lenders carefully. You may be surprised how much their annual percentage rates (APRs) and loan fees vary.
How to apply for a home renovation loan
1. Gather the documents you'll need
Gathering documentation before you apply for a loan can save you time. A lender may ask for these documents:
- Proof of identity
- Proof of address
- Employment information
- Proof of income
- Bank statements
- Tax returns
2. Fill out a loan application
The initial loan application covers the basics, including who you are, where you live, how you earn your income, and sometimes, what you plan to do with the funds.
3. Wait for word from the lender
It's common practice for lenders to check if you "prequalify" for a loan based on the basic information you've provided. If a lender deems you "prequalified," that means it has confidence you'll do fine going through the more in-depth qualification process.
4. Make a decision
Once a lender informs you that you're prequalified, the lender also tells you how much you can borrow and your total APY. If you decide it's the right loan for you, you give it permission to proceed with the qualification and underwriting processes.
5. Provide documents promptly
Your lender may contact you and ask for additional information. For example, a lender may want to know more about your employment background if you haven't been in your current position for long. The more prompt you are about providing the information it seeks, the faster your loan can be processed.
6. Await loan proceeds
The time it takes to fund the loan varies by lender. Funding your loan can take a lender anywhere from days to weeks. If funding time is important to you, ask a lender how long it typically takes before applying.
