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Last updated on 2nd of March 2022

How do home improvement loans work?

If you're looking to make some changes to your home without using  your income or savings, a home improvement loan could help you complete the job. Read on to learn everything you need to know about home improvement loans.
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If you're looking to make some changes to your home without using  your income or savings, a home improvement loan could help you complete the job. 

Let’s explore how  home improvement loans work, what can they be used for and how you can increase your chances of getting one!

Read on to learn everything you need to know about home improvement loans.

How do home improvement loans work?

Home improvement loans are a type of loan which allow you to fund repairs, renovations, extensions or other changes to your home.

This type of loan will usually pay you a lump sum within days (or sometimes even hours) of your application being approved. 

You'll need to agree to make monthly repayments over an agreed upon term until the debt has been repaid in full. 

Once you've received your loan, you can spend it however you wish.

It's up to you whether you use a home improvement loan to pay for the full cost of the work or simply cover a portion of the total cost. 

For example, you may choose to pay for 50% from savings and take out a loan to cover the rest.

What can I use a home improvement loan for?

The good news is you can use a home improvement loan for pretty much any change you'd like to make to your property.

You might decide to take out a home improvement for one of the following:

  • Decorating one or more rooms in your home

  • A loft conversion

  • Adding an extension

  • Building a conservatory

  • Transforming your garage into a gym

  • Adding a downstairs toilet

  • Adding a utility room to your kitchen

  • Having a new kitchen or bathroom fitted

  • Insulating your loft

  • Adding double glazing

  • Installing solar panels 

Whether your home improvements are large or small, you may need to borrow money to pay for the tradespeople or materials you need.

What are the pros and cons of a home improvement loan?

It's a good idea to weigh up the pros and cons of a home improvement loan before making an application. Here are the key advantages and disadvantages.

Pros

  • If you secure your loan against your house or car, you may be able to borrow more money for a lower interest. However, it’s important to keep in mind that if you don’t pay your loan back, you risk losing your house or car. 

  • You could benefit from better interest rates too.

  • If your application is approved, you can usually access the money quite quickly.

 

Cons

  • Missing payments will negatively affect your credit rating.

  • If you have a secured loan and you fall behind on your repayments, you may lose your home or car.

What credit score do I need for a home improvement loan?

So, what credit score do you need for a loan when making big home improvements?

Each creditor will have their own credit score requirements and some are stricter than others.

There is no set credit score required to take out a home improvement loan, but generally speaking, the higher your credit score the more likely you are to be accepted.

It's often possible to access a home improvement loan even if you have a low credit score, but you may struggle to access the best interest rates and terms. 

This could make the debt more expensive overall and see you paying far more in interest than you would if you had a strong credit history.

What are the different types of home improvement loans?

There are two main types of home improvement loan: secured and unsecured.

Unsecured home improvement loans

An unsecured home improvement loan is one that isn’t secured against a valuable asset such as your home or car.

This type of loan can be harder to access if your credit score is low or you've had problems with debt in the past.

This is because lenders may consider you a risky borrower and they may worry about your ability to comfortably manage the monthly repayments.

You might be able to take out an unsecured loan even with bad credit, but there’s a chance you’ll only be able to borrow a small amount of money.

In some cases, this might not be enough to fund the work you want to do to your home. 

High interest rates are another potential issue that some people encounter. If the interest rate is really high, you may decide it's better to wait and save up, rather than taking out a loan.

Secured home improvement loans

If you have a low credit rating or you've had difficulties with debt in the past, a secured home improvement loan may be easier for you to access than an unsecured one.

This is because the debt will need to be secured against a valuable asset such as your home or car.

However, this type of loan can be more risky than the alternative. 

If you were to default on your repayments, your home or car could be taken from you. 

For this reason, it's important that you only take out a secured home improvement loan if you are very confident in your ability to repay the money you owe.

How much can I borrow?

The amount you can borrow will depend on a number of factors. 

These might include:

  • Your credit score

  • Your income

  • The value of your home (if the home improvement loan is secured against your property)

Home improvement loan vs remortgage

It's usually possible to access a home improvement loan much faster than it is to remortgage your home. So if you're looking to borrow money in a matter of days or weeks, a home improvement loan may be right for you.

If your home improvements will be large and very expensive, a remortgage may be a suitable alternative. 

This will involve taking out a new mortgage on your home to release equity that can be used to fund your loft conversion, conservatory build or extension.

Your income, credit score and your property’s value will influence the amount you’ll be able to get from the remortgage process. 

One of the biggest advantages of a remortgage over a home improvement loan is that it'll usually have a much lower interest rate and will therefore be more affordable.

However, it's important to do some sums to make sure the total cost of interest paid over the remainder of your mortgage isn't excessive.

Another benefit is that your home improvement costs and the mortgage itself will be consolidated in one loan. So rather than having to make mortgage payments and home improvement loan payments each month, you'll only need to pay the former.

Home improvement loan vs credit card

Some people use a credit card to fund their home improvements rather than taking out a specialist loan designed for that specific purchase. But is a credit card better than a home improvement loan?

If you already have a credit card, using it to pay for your renovations would save you having to submit a new credit application.

However, credit cards can have higher interest rates than some types of loan - particularly those that are unsecured.

One option is to apply for a new credit card with an introductory 0% interest period. 

To make the most of the card and keep the cost of using it as low as possible, pay the balance before the interest-free period ends. 

Otherwise, high interest charges may apply and the debt could become more expensive over time.

A potential downside of using a credit card rather than a home improvement loan is that having a credit card may encourage you to overspend and go over your budget. 

While a home improvement loan will give you a set amount that you'll have agreed at the start, a credit card can be more flexible.

It can be tempting to put additional expenses on a card that you didn't plan for originally.

Make sure you're aware of your credit limit from the beginning and if your credit card company gets in touch to say they're increasing your limit, don’t see this as an opportunity to spend more than you need to.

What else do I need to consider before taking out a home improvement loan?

Check if you need planning permission

Planning permission isn't something you need before taking out a home improvement loan. 

But by checking if you need planning permission before you get started, you can avoid taking out a loan unnecessarily.

The last thing you need is to borrow money for a large loft conversion, only for the work to not go ahead due to problems getting the necessary permissions. 

This could see you spending the loan on things you don't really want or need and paying interest on a debt that could've been avoided.

It's important to make the required repayments each month, regardless of whether the work goes ahead or not.

Compare a few different deals before making your decision

Whether you decide to take out a home improvement loan, remortgage your home or opt for a different type of loan completely, compare a few different deals before you apply for a loan.

By doing some research, you can increase your chances of getting your application approved, access more favourable terms and potentially lower the amount of interest you need to pay.