How a personal loan for a tiny house works
A tiny house loan is actually a personal loan, which is simply money you borrow from a lender and repay with interest. Most personal loans have a fixed interest rate and are paid back in equal monthly installments. Personal loans tend to be quite versatile and can be used for almost any purpose, including paying for a tiny home.
Pros and cons of personal loans
Before applying for a personal loan, it's good to weigh the pros and cons -- here are points in favor of them:
- Many personal loan lenders allow you to borrow as much as $50,000 to $100,000, meaning you could pay for all your tiny home costs.
- Most personal loans are unsecured, meaning you don't have to risk anything of value.
Here are the downsides:
- You'll pay interest on the loan, and if your credit score is low, your interest rate may be high.
- You'll add a new monthly payment to your household budget.
Getting a low-interest tiny house loan
Ideally, if you decide to take out a personal loan to pay for a tiny home, you'll land the lowest interest rate available. Getting a low rate depends on the following factors.
Your credit score
Those with higher credit scores tend to qualify for the most attractive interest rates. If your score is on the lower side, you may consider borrowing the money from a lender that allows cosigners. A cosigner is someone with a strong credit score who agrees to cosign a loan with you.
If you miss payments, that person is responsible for them, so it's particularly important to stay on top of payments after someone has been kind enough to cosign. When you bring on a cosigner, the lender considers their creditworthiness, and if that person is highly qualified, you benefit by paying a lower interest rate on the loan.
Employment and income
Lenders want assurance that you bring in enough money to repay the loan. Unless you can provide proof of employment and income, you will likely have a tough time getting loan approval. However, if your employment history and income are steady, it gives the lender confidence in your ability to make monthly payments.
Fixed or variable interest rate loan
With a fixed-rate loan, you know what your monthly payment will be because the interest rate never changes. Variable rates, on the other hand, can go up and down over time.
The interest rate on variable-rate loans usually starts lower than that of a fixed-rate loan, making a variable-rate loan appear more attractive. However, if rates increase, you could find yourself with a loan that stretches your budget uncomfortably tight.
Secured or unsecured
A secured personal loan requires you to put an asset of value, such as your home or car, up as collateral. Finding a lender that offers secured loans may benefit you. With a secured loan, the lender knows it can repossess the collateral if you miss payments.
Once the collateral is repossessed, the lender can sell it and recoup its losses. Since there's less risk to the lender, a secured loan may land you a lower interest rate.
Your repayment timeline
The longer your repayment period, the greater the chances are that things will go wrong in your life, and you will have trouble making the monthly payment. Since this represents a risk to the lender, shorter-term loans sometimes come at a lower rate.
How to apply for a tiny house loan
1. Decide how much you need to borrow
Generally, it's best to borrow the smallest amount possible. The more you borrow, the more interest you'll pay.
2. Check your credit score
Each lender has its own minimum required credit score. Before applying, check your score. Remember, the higher the score, the lower the interest rate you'll be eligible for.
3. Determine if you need a cosigner
If you're concerned about how low your credit score is, decide whether you know someone with a high score who might be willing to cosign the loan.
4. Shop around for a lender
It pays to compare multiple lenders to get a loan that works for you. Plenty of reputable online loans are available, as well as loans from brick-and-mortar institutions. Because each lender has its own lending criteria and sets its own interest rates and fees, shopping around is one of the easiest ways to save money.
5. Prequalify
Once you decide which lenders best fit your needs, get prequalified with at least three of them. During the prequalification period, most lenders will ask you to provide basic information, such as:
- Your name
- Address
- Place of employment
- How much you want to borrow
- Your monthly housing costs
6. Compare prequalified loan offers
When a lender tells you you've prequalified for a loan, it believes you're a good candidate and will likely make it through the approval process. Once you've heard back from all lenders, compare their offers and decide which one you'd like to go with.
7. Fill out a full loan application
The only real difference between a complete loan application and the application you fill out to prequalify for a loan is the amount of information you're asked to provide. For example, you'll need to present proof of income and a list of monthly debts
8. Await final word and funding
Once your application goes through underwriting, the lender will let you know whether it's been approved. If the application is approved, your next job is to carefully read the loan contract and ask for clarification if there's anything you don't understand. Finally, you'll sign the agreement and await loan proceeds to hit your bank account.
