Understanding Unsecured Home Improvement Loans

In this article, we explore what an unsecured home improvement loan is, what you need to know about this type of loan, and some possible alternatives to unsecured loans available to you.

What Is an Unsecured Home Improvement Loan?

An unsecured home improvement loan doesn’t require collateral like a home equity loan, which uses your home itself as a guarantee of repayment. Instead, it’s based on your creditworthiness, income, and other financial factors. While it offers a way to fund your renovation project without risking your property, it often comes with higher interest rates. It might also come with stricter eligibility criteria compared to secured loans like home equity.

What You Should Know About Unsecured Home Improvement Loans

Here are a few important aspects to consider if you’re thinking about taking out an unsecured home improvement loan:

Interest Rates on Unsecured Home Improvement Loans May Be Higher

Due to the increased risk for the lender, homeowners often pay higher home improvement loan interest rates than those offering collateral to insure repayment. Interest rates for unsecured loans vary and can range from 6% to 36%. If you have excellent credit, some lenders offer low annual percentage rates starting at the lower end. These rates fluctuate based on factors such as your credit history, the loan amount, and your chosen repayment period. A bad credit score or higher loan amount may come with higher interest rates due to the greater risk it poses to lenders. This can increase the overall cost of borrowing for larger-scale renovation projects. 

Loan Amounts May Be Lower

Since unsecured home improvement loansare risky for lenders, they will usually offer lower loan amounts. Some lenders allow you to borrow up to $100,000, while others may cap the amount at $50,000. This means that the loan may not be enough to cover your full renovation. 

Higher loan amounts, such as those provided by RenoFi Loans, which allow you to borrow up to 90 percent of the after-repair value versus its current value, are ideal if you’re undertaking a substantial renovation project. It means you can access larger sums of money without having to offer collateral. These loans will be dependent on your creditworthiness, income, employment history, and the lender’s policies. If you have an excellent credit score and a strong financial profile, you may be eligible for these higher loan limits. 

Repayment Terms for Unsecured Home Improvement Loans Are Often Shorter

Loan terms for unsecured personal loans are often shorter, providing less risk for the lender. Repayment terms for unsecured home improvement loans typically range from one to five years, though some may extend further. Opting for longer repayment terms can lead to lower monthly payments, making it more manageable for your budget. However, this often results in higher overall interest costs because interest accrues over a lengthier period, increasing the total amount you’ll pay over the life of the loan. 

Some lenders offer flexible repayment terms of up to 12 years. This lets you tailor the repayment schedule according to your financial circumstances and preferences. This flexibility can be particularly beneficial if you’re undertaking larger renovation projects that require higher loan amounts you have to repay. We recommend comparing lender options to find a repayment term that suits your budget and financial goals.

Eligibility Criteria for Unsecured Home Improvement Loans Require Good Credit

Most lenders require a minimum credit score of 600 for unsecured home improvement loans. However, the interest rates offered can vary significantly based on your creditworthiness. If you have excellent credit, you may be eligible for the lowest interest rates and favorable terms. Having bad credit doesn’t necessarily eliminate your borrowing options. Some lenders may accommodate borrowers with credit scores as low as 580. However, lower credit scores could lead to higher interest rates or stricter approval criteria. This might include providing additional documentation, verifying you have a stable income, or offering collateral to secure the loan.

Unsecured Loans Typically Have Various Fees

Unsecured home improvement loans typically come with certain fees to consider, such as origination fees, late payment fees, and repayment penalties. Origination fees, typically ranging from 0% to 8% of the loan amount, are charges imposed by lenders for processing and initiating the loan. While some lenders may waive origination fees, others might apply this cost to cover administrative expenses. If possible, opting for loans without origination fees can save a significant amount. While you may be able to escape the standard fees associated with other home improvement financing options, such as an appraisal fee and title search fee, you also have to consider the higher monthly interest payments that come with unsecured loans. 

Depending on the lender’s terms, you may incur late payment fees if you miss a scheduled payment. Though less common, some lenders may charge prepayment penalties if you pay off the loan before the designated term ends. Before you commit to an unsecured home improvement loan, it’s crucial to review the loan terms, fees, and conditions carefully. Comparing multiple loan offers and opting for loans with favorable terms, such as no origination fees, can lead to more cost-effective borrowing. It can also give you a clearer understanding of the total expenses associated with the loan. 

The Borrowing Process Can Be Simpler

Unlike secured loans, one of the greatest advantages of unsecured home improvement loans is that they don’t require collateral — so you don’t need to pledge your home or other assets as security against the borrowed amount. This means you can get access to funds without the risk of losing your valuable assets in case of default, while this simplified borrowing process also streamlines the application and approval procedures. Some lenders specialize in offering unsecured home improvement loans, focusing on simplicity and accessibility. This focused approach often translates into a quicker and more straightforward borrowing experience.

Apply Online

Some lenders offer online applications with instant decisions, such as preapproval for a loan. Fill out the application form, providing personal and financial details as required. The application typically requests information about the loan amount and basic personal information. 

Submit Documentation

Upload or submit any necessary documents required by the lender. You may need to provide proof of income, employment details, and identification. The lender may also ask for cost estimates or plans for the home improvement project. 

Undergo Review and Approval

Once you have submitted your application, the lender will review it. Some lenders might provide same-day funding for approved borrowers. Others may take a bit longer for a thorough evaluation. If the lender approves your request, they will send you an offer outlining the terms, including the loan amount, interest rate, repayment schedule, and any associated fees. Review the offer carefully before you accept. 

Receive the Funds

After you accept the loan offer, the lender finalizes the loan agreement and sends the funds directly into your account. This usually takes a few business days.

Alternatives to Unsecured Home Improvement Loans

Because of the many drawbacks of unsecured loans, you may be interested in an alternative solution to finance your home improvement project. Here are a few loans for home improvements to consider:

FHA 203(k) Loan

An FHA 203(k) loan is a type of loan that’s insured by the government (the Federal Housing Administration) and allows you to borrow against the after-renovation value of your home. The benefit of this type of loan is that it gives you significant borrowing power, especially if you plan to complete a major renovation. But the downside is the process for obtaining this type of loan can be long and complicated. You also are required to use only licensed contractors, which may not appeal to those who want to do the work themselves. 

Home Equity Loans and HELOCs

Home equity loans and home equity lines of credit (HELOCs) can be a great way to finance home improvement projects, depending on the estimated cost of the remodel. With both of these financing options, you’re simply borrowing against the equity that you’ve built in your home. The primary difference is that with a home equity loan, you receive a lump-sum payment, as opposed to a (HELOC), where you access the cash on an as-needed basis. 

RenoFi Loans

A RenoFi loan is often the best solution, since your borrowing power is set based on the after-renovation value of your home, allowing homeowners to get a lot more to cover their project expenses. A RenoFi Advisor can also help you find a credit union that offers the longest terms and lowest rates. These experts essentially assume the role of a concierge, guiding you to the best financing option for your home improvement project, sparing you from having to do the research yourself.

FAQ About Unsecured Home Improvement Loans

What is the range of interest rates for unsecured home improvement loans?

Interest rates for these types of loans can range from around 6% to 36%, depending on factors such as your credit history, the loan amount, and your chosen repayment period. 

How much can I borrow?

Unsecured home improvement loans are typically between $1,000 and $100,000. The biggest drawback with this is that major home improvement projects average between $100,000 and $200,000, which means you may not be able to access enough money to fully fund your project with an unsecured loan.

What are the usual loan repayment terms?

Repayment terms for unsecured home improvement loans typically range from one to five years.

What credit score do most lenders require?

The minimum credit score depends on the lender and some may work with homeowners who have scores as low as 550 or 600. That said, with a low credit score, you will likely qualify for less money at a high interest rate. By increasing your credit score, you can access better terms and interest rates for an unsecured loan.

What types of home improvement projects can I use this loan for?

You can use an unsecured home improvement loan for a variety of projects, such as remodeling, repairs, and renovations. This includes both interior and exterior home improvement projects, such as remodeling a kitchen, updating a bathroom, replacing a garage door or roof, or building a new addition.

Final Thoughts

Unsecured home improvement loans are versatile. They can help fund a wide range of projects, from small home repairs to major renovations, while offering flexibility and efficiency along the way. These loans provide the funds necessary to make important repairs and upgrades, increase your property’s value, and achieve your vision for your home, but they do come with some drawbacks, including higher rates and shorter repayment terms. It’s important to consider the factors that matter most to you and look into all your options to decide whether another type of loan, such as a home renovation loan from RenoFi, may be a better fit for your needs. These loans are based on the after-renovation value of your home, allowing you to boost your borrowing power significantly and cover your entire renovation wish list.

Sources: 

https://www.bcu.org/Loans/Personal-Loans/Home-Improvement-Loan-and-Line-of-Credit
https://www.lightstream.com/home-improvement-loan
https://www.usbank.com/loans-credit-lines/personal-loans-and-lines-of-credit/home-improvement-personal-loan.html
https://www.sofi.com/personal-loans/home-improvement-loans/