Home values continue to escalate and home inventories for buyers are low. That’s a conundrum for homeowners. Do you sell and take the money now or wait until prices go up even more? There’s a third option. It’s called home improvement. You can build additional value into your home. One of the best ways to do that is with a home improvement loan.

What is a home improvement loan?

There are different types of home improvement loans. In this article, we’ll profile unsecured personal loans for home improvement. They can be obtained from most lenders and are set up as installment loans with payment terms of one to seven years. The interest rate is fixed, as are the monthly payments. Read on to learn how they work and how to apply for one.

How do they work?

A home improvement loan can be for any amount. They usually range somewhere between $5000 and $100,000, depending on the amount of work the homeowner wants done. Once obtained, the loan funds can be used to pay for materials, workers, licensing, and other home related expenses. Interest rates are determined by the credit score of the borrower.

Pros and cons of home improvement loans

ProsCons
Work can be started immediately and completed on schedule Additional debt added to current home expenses
Monthly fixed payments are easier to budget than variable paymentsInterest rates are high for bad credit borrowers
Interest rate is fixedHome improvement loans come with origination fees and monthly fees
Home value will increaseLoan might not cover all costs

Home improvements don’t just happen. Most construction work requires filing for a permit, lining up a contractor, and ordering materials. With a home improvement loan, that work can start on time and be completed on schedule. The monthly payments are fixed and manageable, and the interest rate won’t change. The improvement will increase the value of the home.

The downside of a home improvement loan is that it increases debt when the homeowner already has other expenses, including mortgage payments in most cases. For bad credit borrowers, the interest rates and fees are high. There could also be additional fees and the amount of the loan might not cover all the work. That could leave the project unfinished.

Alternatives to home improvement loans

Home ownership gives the borrower additional options. Instead of applying for an unsecured personal loan that could come with a high interest rate, you can use the equity in your home to get funds using one of the following options:

Home Equity Loan:

A home equity loan is a personal loan secured by the equity you own on your house. Interest rates are typically lower than on unsecured loans, but you could go into foreclosure if you default. A home equity loan is a second mortgage.

Home Equity Line of Credit (HELOC):

A HELOC is like a home equity loan, but the borrower takes only what they need and can go back for more funds if they require them. The lender sets a cap on how much and its reusable after it’s been paid back. HELOCs are a great option for home improvement where costs are uncertain.

Home improvement loans for bad credit

Individuals with bad credit (credit score under 670) will have difficulty getting a home improvement loan if the amount needed is $10,000 or above. Smaller loans are available, but interest rates will be high, and they might not provide enough funding to finish the home improvement project. A home equity loan or HELOC might be a better option.

Pros and cons of home improvement loans for bad credit

This part isn’t overly complicated. The pro is getting the money to do the home improvement project. The con is the high interest rate and fees you’ll need to pay to get it. Taking out a personal loan for a home improvement project when you have bad credit might not be the best option for you. On the positive side, if you do it and pay it off, your credit score will improve.

Related: The Best Ways to Build Credit and Improve Your Score

How do I qualify for a home improvement loan?

Home improvement loans are larger than the average personal loan, so a good credit score is essential for the borrower. Most lenders require a score of at least 670 for loans of $10,000 or more. Check your credit score before applying and research lenders that specialize in home improvement loans. Some of them even work with bad credit borrowers.

How do I apply for a home improvement loan?

Most lenders today have an online application you can fill out. You’ll need to prove who you are, so have a digital copy of your driver’s license available. You’ll also need to verify employment and income. You can do that with paystubs, W2’s, and 1099 forms. Have all these items ready before you start the application. Approval for larger loans takes a few days.

How to compare home improvement loan lenders?

A home improvement lender is a partner in your journey of home ownership, so you’ll need to know that you can trust them. Look for established lenders and check their reviews. Another good resource to verify legitimacy is the Better Business Bureau. This is not an emergency scenario, so take your time. You’ll also want to compare interest rates, terms, and fees.

Commonly asked questions about personal loans

Most traditional banks avoid bad credit loans for homeowners. They prefer that the homeowner apply for a home equity loan or HELOC. The best place to find a personal loan for home improvement, especially for bad credit borrowers, is through an online lender.

Yes, all personal loans affect your credit score. The score goes down slightly when you first apply for the loan, decreases a bit further when the funds are transferred, then goes up as you make your monthly payments on time.