Why you should never take out a personal loan for home renovations, Lifestyle News
Why you should never take out a personal loan for home renovations, Lifestyle News

Renovating your home is always an exciting thing to look forward to, with the promise of a renovated and better looking home to come back to.

That is, of course, until everyone sees the bill.

There are a variety of ways to finance your home renovations, but taking the wrong approach by getting a personal loan or line of credit could cost you thousands more.

That’s why a renovation loan is so important, and here are the differences you need to know:

Renovation loan vs personal loan

Personal loans and home improvement loans may sound deceptively similar – they both offer loan terms ranging from 12 to 60 months and provide loan amounts up to 6 times your monthly income or $30,000. In fact, you may see banks advertising their personal loans as a way to fund home improvements with “low interest rates and monthly payments.”

Don’t be fooled.

Once you look at the interest rates of both, it’s obvious which one is the better deal. Here’s why you should avoid taking out a personal loan for your renovation:

  • Personal loans have higher processing fees: Do you like the idea of ​​having to pay a “processing fee” of 1.5% to 4%+ on your personal loan? That’s up to $1,200+ net of your loan!
  • Personal loans have higher interest rates: how much higher? Try 3X-4X higher than some renovation loan packages offered by banks. This adds up to higher monthly repayments and thousands of dollars in extra interest you have to pay.

Now let’s see how a home improvement loan compares to a personal loan if you want to borrow $30,000 to renovate your home and want to pay it off in five years.

5-year renovation loan at 4.18% interest (compounded monthly)

Year Remaining balance Main Interest Monthly payment

1

$30,000.00

$450.44 to $468

$104.50 to $86.94

$554.94

2

$24,490.00

$469.63 to $487.94

$85.31 to $67

$554.94

3

$18,745.22

$489.64 to $508.73

$65.30 to $46.20

$554.94

4

$12,755.66

$510.50 to $530.41

$44.43 to $24.53

$554.94

5

$6,510.87

$532.26 to $553.01

$22.68 to $1.93

$554.94

Total amount payable + interest

$33,296.15

5-year personal loan at 7.9% interest (fixed rate)

Year Amount of the loan Interest per month Monthly payment

1

$30,000.00

$106.86

$606.86

2

$106.86

$606.86

3

$106.86

$606.86

4

$106.86

$606.86

5

$106.86

$606.86

Total amount payable + interest

$36,411.43

If you are a mortgage loan customer of a particular bank, you will be able to benefit from a slightly more advantageous “professional” rate on your renovation loan. This is the bank’s way of rewarding “loyalty”. Some banks may even offer a “promotional” rate for five years.

Again, don’t be fooled! Even this “deal” is costly, as the total amount you will have to pay back for a $30,000 renovation is $36,411.43! That’s $6,000 in interest! On the other hand, a good renovation loan will come with an interest rate well below 4%.

*Note: Not all home improvement loans are created equal, as interest rates can vary from bank to bank. You can save time researching and get quotes for the best home improvement loan rates here.

Use a personal loan for everything EXCEPT renovations

As you can see, there is a huge difference between home improvement loans and personal loans in terms of the interest you will pay. But that doesn’t mean you should completely avoid personal loans.

ALSO READ: Bank Loans vs Approved Lenders: Which is Better?

Personal loans can be a great way to boost your cash flow to overcome a short-term financial emergency. You can even use a personal loan to finance a vacation, a wedding or buy a nice gift for your loved one.

It’s also a much better way to pay off your credit card debt with a personal loan (because 24% a year is just crazy).

Remember to exercise caution and make sure you can afford the monthly repayments. If you’re looking for the latest personal loan rates from any bank, you can get them easily with MoneySmart’s Personal Loan Wizard.

This article was first published in MoneySmart.

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