Unless you have enough money already, taking out a loan is a good way to fund your renovation project. Here, Robbie Fowle from H&T, gives his advice for choosing the best loan for you.
Even the most beautiful homes need a bit of a refresh every now and then. If you’ve decided to renovate your home in 2020, you’ll no doubt be thinking of how you’ll fund the work.
When you’re paying for materials, labour costs, and brand-new furniture, the price of renovation projects can quickly add up. So, in most cases, a loan is the best option.
If you’re thinking of taking out a loan for your project, there are a few things you’ll need to consider in order to choose the right one for you.
Different places will offer different types of loans, amounts, terms, and interest rates, and picking the wrong one could end up costing you more in the long run as you try to pay it off. It’s important that you weigh up your options to figure out which one you want to take out.
So, below, I’ll be giving you my advice for choosing a loan for your renovation project.
Secured vs unsecured loans
When looking for the right loan, you might come across secured and unsecured loans. But what do these terms mean?
Secured loans, such as pawnbroking loans, can be given as long as you hand over an asset, such as a piece of jewellery. Your loan amount will be determined by the asset’s value.
Unsecured loans, such as personal loans, don’t require you to offer an asset as security.
You’ll be given a lump sum based on factors such as your credit score and income. To find out more, check out our guide at H&T, which takes a look at the difference between secured and unsecured loans.
Both of these loan types have their benefits, and the one you choose can depend on the amount you want to borrow and your credit rating.
You can still get a secured loan even if you have a low credit score. So, this could be a good option if you’ve already been rejected for an unsecured loan or other forms of credit — such as credit cards.
You’ll also want to consider the amount of money you can afford to borrow. To do this, work out how much your renovation work will cost you in total, and try to find a loan that will give you enough, but one you can still afford to pay in full.
Be cautious here and don’t just take the loan that will offer you the most amount of money, you’ll only end up paying more money back and over a longer period of time. Plus, you could run the risk of not paying it back on time.
Most lenders will have a minimum and maximum amount they’re prepared to lend. For an unsecured loan, the lender will typically take into account your income, and ask about your spending in order to determine how much money they’re going to give you.
If you’re not accepted for an unsecured loan on your first try, you could ask for a lower amount, or ask a friend or family member to act as a guarantor. Otherwise, you could consider a secured loan.
The loan term is the amount of time you have to pay your loan back, and depends on the lender and the loan amount.
Usually, when you’re taking out your loan, you’ll be able to choose how many months you’ll have to pay it back. The longer the loan term, the lower the amount you’ll need to pay each month.
Bear in mind interest will be charged as time goes on, so a longer-term loan means you’ll often be paying back more overall. Ideally, you’ll want to choose the smallest amount you can work with and pay it back as quickly as you can.
When you take out a loan, you’ll be charged interest on top of your loan amount, so you’ll always want to go for the loan with the lowest interest rate.
This is usually given to you as an annual percentage rate (APR), which takes into account the annual interest rate, as well as extra costs such as admin fees.
Lenders will always give you their representative APR before you take out a loan, which isn’t a guaranteed amount, but the amount of APR they typically charge. So, you’ll be able to use this to work out approximately how much you’ll need to pay back and whether you can afford it.
Taking out a loan can be worthwhile if you want to give your home a refresh. But, when you’re faced with so many options, it can be difficult to know which one is right for you. By following these tips, you can take into account different loan types, amounts, terms, and interest rates in order to make a more informed decision.