Home improvement loans are a popular way to secure finance should you desire a new bathroom, or kitchen suite – or need to make any other renovations to your home. Financial matters regarding loans can seem quite complicated at first, but it's important that you do your research before committing yourself to any lending agreements. Our guide to home improvement loans should help you gain enough of an understanding to make an informed decision as to what's best for you.
What are the options?
There are two main types of loan you can look for as a source of financing. The type you look for will depend largely on the amount you need to borrow, as well as your personal circumstances.
An unsecured/personal loan will allow you to borrow up to £25,000 from most lenders. As a general rule of thumb, you can borrow on a personal loan for a period of up to ten years, although you might expect the interest rates to increase in-line with the length of the loan. These types of loan are described as being 'unsecured', as they are granted dependent upon the applicant passing a credit check.
If you're struggling to secure a personal loan – or if you need to borrow more than £25,000, it’s likely that you will need to take out a 'secured' loan. In practice this means that the loan is 'secured' against a property or other asset of yours, which you nominate as collateral should you be unable to keep up the repayments. Secured loans give you much more borrowing power, with most providers offering well over £100,000, over a period of up to 25 years.
It goes without saying that an unsecured loan is the safest (assuming that it's within the realms of what you want to achieve), as there's no direct risk of losing your home if things go wrong. If you need to borrow less than £25,000 but can't get credit for a personal loan, you might want to look into 'guarantor loans'. These basically work by getting someone with a good credit history (friend, relative; anyone really), to vouch for you and agree to pick up the repayments themselves if you cannot make them for whatever reason.
Using a loan to add value from improvements
If you're looking to take out a loan to specifically make improvements which are intended to add value to your home, there are a few things you need to consider and weigh up first.
To help you assess how much of a rise in value you can expect, you should thoroughly research similar properties in your area to get an idea of the current market prices. This will help you estimate how much value the conservatory your building, or new kitchen suite will actually add.
Once you’re satisfied that you have a good idea of this, you can start to assess the financial costs and whether the risk and inconvenience is worth it. Converting your loft into a spare bedroom will no doubt add thousands to your properties value – but how much are the conversion costs, and how long will it take?
For example, if the improvements were estimated to cost £10,000, but will only raise the value by around £12,000- you may deem that the inconvenience, and risk of the extra financial burden aren't worth it.
Don't forget of course, if you do take out a loan to make improvements, you've also got to add the interest of the loan onto the cost of the works to get the true total. There are plenty of free APR calculators online which will help you to calculate the cost of the loan itself. To give you a rough idea; if you were to borrow a sum of £10,000 over 10 years, with an interest rate of 12% - by the end of the repayment period you would have paid back a total in excess of £17,000! Perhaps the expected value increase in this particular example is around £30,000 and £17,000 still doesn't seem like a bad deal, but remember you have to brace yourself for fluctuations in the housing market, as well as any other eventualities which might occur to cause you problems. Ultimately taking out a loan to increase your houses value carries a risk, but with an appropriate amount of planning and research, there's no reason why they can't work for you.Image: © Michael Spring | Dreamstime.com