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A home improvement loan does pretty much what it says on the tin: it’s a loan you use to make improvements to the house or flat you live in. In many cases, it can be a really straightforward product: you can work out how much you need in order to fund a project, borrow a lump sum and repay it over the lifetime of the loan.

Koyo uses Open Banking technology, so that we can base our lending decisions on your real financial situation - rather than what someone else says about you. Find out more at www.koyoloans.com. Representative APR 27%

You can use them for all sorts of things: it could be to upgrade your windows, install a loft conversion or new kitchen to add value to your house or fix your roof following some damage.

If you’ve already done your homework and know what you’re looking for, you can take a look at our personal loans - but if you want more information, read on: in this article we’ll offer an insider’s guide to how they work, so that you’ll know exactly what to look for if you’re considering one.

How does a home improvement loan work?

A home improvement loan can be a very simple way to borrow money. You don’t need a specific type of product - a standard personal loan can be used - and if you have a good credit score, you’ll have your pick of hundreds of providers.

Here’s how a typical home improvement loan works in practice:

  1. First off, you’ll need to decide what home renovations or improvements you want to carry out

  2. Then, the slightly trickier part: you’ll need to get an accurate idea of the costs involved. If you’re carrying out the work yourself, you’ll mainly need to account for the materials involved, but if you’re having builders or other tradespeople in, you’ll want to get quotes from suppliers

  3. Once you have the amount required, you can look for the best loan provider for you - a comparison site can be useful here, but it’s also worth going direct to a few providers as not all providers will be listed

We’ve talked mainly about improvements to your house or flat here, but you can also use an unsecured loan to make improvements to your garden - the process is exactly the same.

How much should I budget?

There’s a balancing act to be struck here: it’s fairly common for a project to run over budget (this is particularly true for large or complex projects), so you might want to build in a small buffer. However, it’s also expensive to borrow a larger amount than you need, particularly if the interest rate is high. 

For that reason, it’s important to try to be as accurate as possible when costing your home improvement project out.

Unsecured vs secured home improvement loans

There are two types of loan to be aware of here.

For smaller projects - generally up to £20,000 or £25,000, you’re likely to be able to take out an unsecured home improvement loan. This means that a lender will provide you with a loan without needing to take your house as security. This is a safer option for borrowers, as it makes it much less likely that you will lose your home if you fail to make full repayments (however, there are serious, long-term consequences to defaulting on any form of credit, and you should never borrow more than you can afford to repay).

However, if you’re considering a larger project with a higher total amount, you might need to look at a secured loan (also known as a home equity loan). Depending on your personal circumstances (your eligibility) and the current value of your home, you might be able to borrow hundreds of thousands of pounds. The catch, however, is that the loan will be secured against your home, meaning that if you fail to make repayments, the lender will be able to take your house in order to make a recovery.

Koyo loans are unsecured personal loans, and we offer loan amounts between £1,500 and £7,500 with a representative APR of 27%.

Are home improvement loans a good idea?

There are two questions being asked here:

  • Are home improvements a good idea?

  • If so, is it a good idea to fund that home improvement with a loan?

Let’s take a look at each one in turn.

Reasons for home improvement loans

There are - roughly speaking - three reasons to make home improvements:

  1. Because it is necessary (e.g. you’ve sustained damage to your home that needs fixing, or to prevent damage from happening in the first place).

  2. Because it will add value to your home, more than paying for itself in the long term (e.g. you want to add an extra bedroom, upgrade a tired looking room which could be putting off buyers or install double glazing to save on your energy bills).

  3. Because it will improve your quality of life (e.g. you want a new bathroom to relax in, putting down some nicer flooring or a new look for your kitchen).

An illustration of some of the most common reasons for carrying out home improvements

None of these are bad reasons to make home improvements, but here we’ve put them in a rough order of priority. The first category of home improvements are almost certainly a good idea - your home needs to stay habitable, so protecting it or preventing damage is a very sound investment.

The second category - to add value to your home or invest in something which will save you money in the long term - is also a sound idea. However, you have a bit more flexibility here: these aren’t essential, and you’ll want to carefully weigh up the pros and cons. If you’re currently living paycheque to paycheque, for example, now probably isn’t the right time to make this sort of investment. 

However, if you’re planning on selling soon, it can still be worth bringing this sort of improvement forward - if you’re able to get an extra £10,000 on the sale of your house by spending £5,000 on improvements, that’s very worthwhile.

The last category - carrying out work to improve your quality of life - is also important. After all, what’s the point of being a homeowner if you don’t enjoy living in it! One of the most satisfying things about owning your own home is the freedom to make it yours.  Here though, as with the previous category, improvements aren’t essential, and you can delay them if your financial position is not good.

What type of loans are best for home improvement?

Taking out a loan costs money (the interest that you pay), so it’s generally a good idea to pay for home improvements with cash if you can afford to.

If not, the universal rule of borrowing applies: you should only borrow what you can afford to repay. Use a loan calculator, and consider your likely outgoings over the years ahead.

What are the alternatives to home improvement loans?

There are a few alternatives you might also want to consider, depending on your financial circumstances.

Option

Pros

Cons

Unsecured personal loan

Simple, relatively cost effective way to borrow

Maximum loan size of around £20,000-25,000 for most providers

Secured personal loan

Can be used to borrow larger amounts of money

Secured against your home

Credit card

Protection for borrowers

Can’t be used for large amounts, may be expensive

Add to existing mortgage

Interest rate can be low

-

Savings

Most cost-effective way to fund improvements: no interest payments

None - so long as you have sufficient savings! If not, you’ll need time to build them up

Increasing your existing mortgage

If you have sufficient equity in your home, you might be able to borrow more when you remortgage. This amount is added to your existing mortgage (and therefore to your monthly repayments), which is secured against your home, but can be at a lower interest rate than other forms of borrowing. 

Using a credit card

If you’re not planning on spending too much on your home improvements, you might be able to fund it using a credit card. This is only a good idea if you’re eligible for a credit card with a low APR (or annual percentage rate); otherwise it can be a very expensive form of borrowing. This will generally depend on your credit history - borrowers with a bad credit rating will have to pay higher interest rates. 

Paying via a credit card means that you’ll be protected by Section 75 of the Consumer Credit Act, which can safeguard you if goods or services go wrong.

Equally, if you have access to a cheap overdraft via your bank account, this can be a good way of borrowing a small amount of money. Rather than making monthly payments, you can repay it in your own time.

Paying with cash

If you have sufficient savings, paying with cash can be a great idea - just make sure that you always maintain a buffer. Paying with cash shouldn’t mean that you wipe out your savings altogether, meaning that you have nothing left for an emergency.

Hopefully you’ve found this guide useful - but if there’s anything else you want to know, leave a comment below and we’ll update.

And if you have the information you need, you can take a look at Koyo’s personal loans on our homepage.

Now that you’ve read our article on home improvement loans you might want to take a look at some of the options available to you. Our loan calculator is a great place to start.

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