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Why use a personal loan for a home renovation?

From large-scale makeovers to smaller DIY projects, home renovations may help increase the overall value of the home by making it more modern or functional. And best of all, you (or your tenants) can also enjoy a newly refurbished home.

Whether you’re looking to extend a patio, upgrade a kitchen and bathroom or add a new storey to your property, it’s no secret that renovating in Australia does not come cheap. And this is where a personal loan may come in handy.

A personal loan for home renovation is one way to fund your home renovation project. Also known as home improvement loans or renovation loans, this is when a personal loan lender provides you with a lump sum that is used for the purpose of funding home improvement projects (assuming you meet all eligibility criteria).

Benefits and potential risks of a home improvement personal loan

There are a range of benefits to using a home improvement personal loan to fund your renovation dream, as well as some potential drawbacks that are worth weighing up before you apply:

Benefits of a home improvement personal loan:

  • Personal loans typically have lower interest rates than credit cards. If you were tossing up between funding your project with plastic or with a loan, the interest charged through the latter may be lower.
  • Borrowers will generally pay back the loan over a fixed term of 3 to 7 years. When compared to using a credit card, for example, your repayments may stretch out for years depending on how much you repay. A personal loan may offer you more assurance you can pay off the debt in a set period.
  • Personal loans may offer features that make the loan more flexible, such as the ability to make extra repayments or a redraw facility.

Other factors to consider about home improvement personal loans:

  • You may have to pay upfront fees, such as establishment fees, as well as ongoing fees, such as annual fees, with a personal loan.
  • The housing market fluctuates and there is no guarantee that home improvement as funded by a personal loan will increase your property’s value.
  • Not all lenders will offer you flexibility through features, so be sure to compare your options thoroughly if this is important to your loan search.

Can you use a personal loan to add value to your home?

Making improvements and modernising the design and feel of a property is one way that you may be able to increase its value. Anything from updating the kitchen to adding a granny flat may have a positive impact on the value of the property, which is crucial if you’re considering selling or looking to refinance and access the equity in your home.

But it’s important to remember that not all home improvements will add value to your home. If the market were to fluctuate due to reasons out of your control, such as a recession or a global pandemic, then a coat of fresh paint will do little to encourage buyer interest.

If increasing the value of your property is your primary goal, then you should look into what type of renovation could make your home more attractive to buyers. According to Domain research, the most lucrative projects to add value to your home and potentially offer the highest returns include:

  1. Kitchen
  2. Bathroom
  3. Repainting
  4. Street appeal
  5. Outdoor entertaining

Minor home improvements could also bring up the value of your home without being too expensive or disrupting living arrangements of residents. Be sure to research which options may best suit not only your renovation goals but also your budget.

What personal loan features could be useful for a home improvement project?

There are several features that make up a personal loan and it’s important that you take time to choose which options may best suit your home improvement needs and fit into your budget.

Fixed or variable

Personal loan rates come in both fixed and variable forms. Fixed rate personal loans will have one interest rate that keeps your monthly repayment amount steady over the loan term. This can be useful when it comes to budgeting for repayments. However, loan features like making extra repayments are more commonly found with variable rate personal loans.

Variable rate personal loans generally have a lower interest rate than fixed loans but will be subject to rate changes according to market conditions. If rates rise, your personal loan rate may rise too, but if rates fall, your interest rate and loan repayments will decrease.

Secured or unsecured

Choosing between a secured or unsecured personal loan can have a considerable impact on the total cost of the loan. A secured personal loan involves you offering up an asset as security that the lender 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.

An unsecured personal loan does not require you to offer up an asset as security, so there is no risk of losing said asset. However, this option may come with higher interest rates or fees due to the increased risk placed on the lender. If a low rate is important to you, then it may be worth considering a secured personal loan.

Loan term

The actual length of the personal loan term you choose will also impact the overall cost of the loan. A short-term personal loan (1-3 years) will generally mean you’re paying a higher ongoing repayment (weekly, fortnightly, or monthly) but will be charged less interest over the life of the loan.

A longer-term personal loan (4-7 years) may offer lower ongoing repayments, but you could pay more interest as it is spread out over a greater period. The better option will depend on your budget and financial situation.

Redraw & extra repayments

Some personal loan lenders offer features that may help reduce the cost of your loan or create more flexibility. Finding a loan that allows you to make extra repayments may give you more control and potentially reduce the interest you pay over the life of the loan. You will find that the faster you can pay down the loan, the more you will save over time.

And if you want to access these extra repayments for any reason, a redraw facility may let you do just that. Personal loan with redraw facilities allow borrowers to draw down additional repayments paid into a loan. Keep in mind that for both features, additional fees and interest may be charged.

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Personal loan vs line of credit

Still not sure if a personal loan is right for you? You may want to consider a line of credit. Unlike traditional personal loans a line of credit loan lender will only charge interest on the credit you have used, as opposed to interest charged on the total loan balance. It is more similar to a credit card than a personal loan.

There two different types of line of credit, which may be used to fund your home renovation dreams:

  1. Home equity loan – You draw down on the equity in your home loan and are charged interest on only the funds you spend.
  2. Unsecured line of credit – Also called an ‘overdraft’ this option may mean you’re only charged interest on the credit you access, as opposed to being charged on a full personal loan balance.

How to apply for a home renovation personal loan

You’ve done your research and believe a home renovation personal loan is the right choice for your financial situation. Applying for a home renovation personal loan may be a simpler process than you think. Simply follow these steps:

  1. Check your credit history: If you haven't checked your credit score recently, consider visiting RateCity's credit score hub to find out. Once you know your credit score, you’ll have a better idea of which loan products and interest rates might be available to you.
  2. Consider your budget: Use the Borrowing Power Calculator to discover how much you may be able to afford to borrow with your personal loan. Then use the Personal Loan Repayment Calculator to get a loan repayment estimate, including the total cost of the loan and total interest payable. This could help you make a more informed decision based on what works with your budgeting requirements.
  3. Compare loan options: RateCity makes it easy for you to compare a wide range of personal loan products from Australian lenders. Use comparison tools, such as tables and comparison rates, to narrow down your shortlist, and let our Real Time RatingsTM system help you identify which loans best suit your individual needs.
  4. Ensure you're eligible: Now you know which loan you want, it's time to check whether you meet all the eligibility criteria. Remember, these can differ from one loan to the next. Consider reaching out to the lender if you have any questions and read the product disclosure statement provided.
  5. Begin the application process: When comparing personal loans at RateCity, you can click directly through to the lender's website to apply online for your preferred personal loan. Consider having all the required documentation handy before you get started on your loan application. Keep in mind that applying for more than one personal loan (or any financial product) at any given time can hurt your credit score.
  6. Submit your application: Once you submit the required documentation, simply await communication from the credit provider with an update on your application status. Personal loan approval times vary and may take a few hours or several business days.

Alternatives to funding your home renovation

There are other options homeowners may be considering as well to fund their home makeover if they cannot stump up the cash, including:

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 loan. This can help keep the long-term costs of borrowing money to a minimum

Using a personal loan can also minimise the time spent paying back the loan, which may mean less total interest paid on the loan. In contrast, accessing funds from your home loan's redraw facility to use for a renovation could mean 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. Consider speaking to a mortgage broker for more information about redrawing from your mortgage.

Can I merge my personal loan with my home loan?

Yes, you can refinance your home loan and, in the process, merge or consolidate your personal loan and home loan. By doing so, you can lower the number of debts you have, and you may also reduce the total interest you have to pay.

However, you should consult a financial advisor or a mortgage broker to confirm that you are decreasing your total outstanding debt, including interest payments. The repayment term for a home loan can be much longer than that for a personal loan, and by merging the two, you could be repaying a higher amount over the full term.

Can you refinance a $5000 personal loan?

Much like home loans, many personal 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.

What is a personal loan?

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 typically 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.

Is a personal loan a variable or fixed-rate loan?

Depending on the personal loan lender, you may be able to choose between a fixed and a variable interest rate. But, there are a few distinct differences between the two, so it’s important to weigh up the pros and cons before deciding on what’s right for you.

A fixed interest rate loan gets you the convenience of knowing exactly how much you need to repay each fortnight or month. On the other hand, you generally won’t be able to make lump sum or advanced payments to close your personal loan early - or at least not without a penalty.

With a variable interest rate personal loan, you may be able to get a longer loan repayment term, with the option of paying off the loan early. You typically won’t need to pay any additional charges for an early full repayment either. The potential disadvantage with an interest rate that can change is that your repayment is not entirely predictable, as it can fluctuate with the market. However, you’ll likely have more options as more lenders offer a variable interest rate personal loan.

What is a bad credit personal loan?

A bad credit personal loan is a personal loan designed for somebody with a bad credit history. This type of personal loan has higher interest rates than regular personal loans as well as higher fees.

This article was reviewed by Personal Finance Editor Mark Bristow before it was published as part of RateCity's Fact Check process.