Home Improvement Loans vs Home Equity Loans – Comparison
Representative example: If you borrow £34,000 over 15 years at a rate of 8.26% variable, you will pay 180 instalments of £370.70 per month and a total amount payable of £66,726.00. This includes the net loan, interest of £28,531.00, a broker fee of £3,400 and a lender fee of £795. The overall cost for comparison is 10.8% APRC variable. Typical 10.8% APRC variable
Representative example: If you borrow £34,000 over 15 years at a rate of 8.26% variable, you will pay 180 instalments of £370.70 per month and a total amount payable of £66,726.00. This includes the net loan, interest of £28,531.00, a broker fee of £3,400 and a lender fee of £795. The overall cost for comparison is 10.8% APRC variable. Typical 10.8% APRC variable
If you’re seeking credit to complete home improvements, you’ve probably found yourself reading about the home improvement loans vs home equity loans debate. These two credit options can both be used for home renovations, so how do you know which one to choose? We discuss the details so you can make an informed and personalised decision.
What is a home improvement loan?
A home improvement loan is a type of personal loan that is used to complete home renovations. Examples include redecorating, upgrading white goods and furniture or more substantial building projects such as extensions, new kitchens or loft conversions.
What is a home equity loan?
A home equity loan is a type of secured loan that uses your home equity as collateral and to determine how big of a loan the homeowner can get. You might be able to get up to 80% of your home equity as a loan, and for people with a lot of equity, this means accessing a significant amount of money for big renovation projects.
The loan is paid out in a single payment and then repayments begin immediately with interest added. These payments continue for a fixed term until all the loan and interest has been repaid. However, if you fail to pay back what is owed, the lender can initiate foreclosure, meaning you are forced to sell your home to repay the debt.
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How do home improvement loans work?
These loans work similarly to most personal loans. The loan is paid to the homeowner as a lump sum and they then make monthly payments that repay the principal loan amount plus an agreed rate of interest. The loan is usually provided within a few days after approval and repayments begin the following month.
A home improvement loan, either as an unsecured or secured loan, will have a fixed repayment period. Once this period is over and all payments have been made, the loan is paid off.
Home improvement loans for all purposes
- Stuck paying high interest on credit card debts & loans?
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How does a home equity loan work for home improvements?
Home equity loans can be used for an array of purposes, including debt consolidation, to fund holidays and car purchases, education bills and to help younger families buy their own property. But it just so happens that a home renovation project is one of the most popular reasons – if not the most popular reason – that people choose to take out a home equity loan.
Home equity loans work in the exact same way as described above for completing home improvements. In fact, using a home equity line of credit to complete these projects can be beneficial because it helps homeowners split the project into stages within the draw period and avoid overspending.
What is the difference between a home equity loan and a home improvement loan?
There are minimal differences between secured home improvement loans and home equity loans when they both use the property or home equity as collateral within the loan agreement. In these cases, the only big difference is that a home improvement loan should be exclusively used to fund home renovations, which is not the case with a home equity loan. You could use a home equity loan to fund home renovations and for other purposes.
A HELOC adds further differences to a home improvement loan because of the way it is paid out and repaid. And unsecured home improvement loans are vastly different to HELOCs or home equity loans because they do not use an asset as security, meaning the amount available to borrow and the interest rate are typically not as appealing.
Another potential difference between the two is that home equity loans come with closing costs whereas a home improvement loan may not. However, the latter may include other loan fees.
Home improvement loans vs home equity loans
Because secured home improvement loans and home equity loans are almost identical with some differences, there is no way of exclusively saying that one should be used over the other. The best option will depend on personal circumstances and what each lender is offering within repayment terms, especially additional loan fees and the interest rate.
Always do your research and employ professional help if needed.
