How to use a personal loan for home improvement

Adding upgrades to your house is one of the most satisfying parts of homeownership, allowing you to design the home of your dreams while also building wealth at the same time. Homeowners also have many options available to finance home renovation projects. 

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Home equity loans and lines of credit — two types of second mortgages — often get all the glory when it comes to home renovation financing, but don’t overlook unsecured options like personal loans. Depending on your project needs, your individual comfort level, and your financial situation, a personal loan for home improvement might be the better option. 

How a personal loan for home improvements works

Lenders allow you to use personal loans for anything you want, making them a popular option for homeowners looking to fund home projects. You can use them to pay for solar panels, for example, or to install a new pool or remodel your kitchen. 

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The way you take out a personal loan for home improvements isn’t any different from taking out a personal loan for other uses, aside from a little more upfront planning. Here’s how it works:

1. Determine project funding needs: You’ll only get one chance to get all the funding you need without having to apply for a second loan, so take the time to estimate your project costs well. Get a detailed estimate from contractors, or create one if you’re doing a DIY home improvement project. Compare your potential loan payments against your budget.
2. Prepare application materials: Check your credit report and your credit score so you know which lenders you may be more likely to get approved with. Collect digital copies of your recent financial statements in a folder that you can easily share with potential lenders. 
3. Compare funding options: Make sure to consider other funding options like home equity lines of credit (HELOCs) and cash-out refinances. When you’re sure personal loans are right for your needs, check your rate and term options with different lenders. 
4. Apply for the right loan: Choose the loan offer that fits your needs the best and offers the best rate, and complete a full application with that lender. You’ll need to submit the documents you rounded up earlier, along with any other requests from your lender. 
5. Receive funds: You’ll typically hear back from your lender within a few days or even hours. If you’re approved, they’ll disburse the funds shortly thereafter. You’ll typically receive a deposit into your bank account, but some lenders issue funds via check. 
6. Repay the loan: You’ll begin making monthly payments on your loan until it’s paid off. It’s best to sign up for autopay so you don’t miss any payments. Some lenders even offer a small interest rate discount if you do this.

Pros and cons of using a personal loan for home improvement

Personal loans are good choices for certain types of home improvement projects, especially smaller ones. Here’s how personal loans compare to other possible funding options when you’re considering them for home improvement projects in particular:

Pros

• Fewer fees: Many lenders don’t add pesky charges like an origination fee or prepayment penalty with personal loans. Other home improvement loans, in contrast, may come with closing fees ranging from 2% to 5% of your loan amount.
• Less foreclosure risk: Personal loans are unsecured, meaning that your lender can’t directly foreclose on your home if you default. You’re less likely to lose your home if you can’t repay the debt. 
• Faster funding timelines: Some personal loan lenders offer same-day funding, much quicker than second mortgages which can take weeks to approve and fund. 
• No home equity used: Another benefit of using unsecured loans is that you’ll retain more of the hard-earned equity you’ve been building in your home. Your home will be paid off sooner, and you’ll still have it as a reserve to draw from later if you really need it.
• Better for smaller home improvements: Many of the highest-ROI home upgrades can be done for just a few thousand dollars, so you don’t necessarily need a decades-long second mortgage loan option. Personal loans fit a shorter repayment timeline better. 

Cons

• Higher interest rates: Banks were charging an average of 4.46% more for a three-year personal loan than a five-year home equity loan during the third quarter of 2024. That would add an extra $702 in interest over a three-year, $10,000 personal loan.
• Can’t deduct interest: The interest you pay on second mortgages used for home improvements and repairs is tax-deductible in many cases. Personal loan interest is generally not tax-deductible, however – even if you use the funds for the same purpose. 
• Larger monthly payments: Home equity loan term lengths can extend out to 20 years, whereas most personal loans are paid off in five years or less. Shrinking down your loan term length means each individual payment will be larger.  
• Greater approval requirements: You’ll need a better credit score to get approved for a personal loan since you’re not relying as much on your home’s equity to back you up. Lenders typically require a credit score of 700 or more for the best personal loan rates.
• No ability to draw additional funds: Unlike a HELOC that allows you to borrow multiple times, a personal loan is a one-and-done deal. If you find out you need more funds later (which is common in renovation projects), you’ll need to get a new loan.

Alternatives

Not all types of home improvement loans work the same. It’s important to consider your other options before deciding on an unsecured home improvement loan because, quite often, another funding method might work better for you. Here are other possible choices:

• Cash-out refinance: Replaces your current mortgage with a larger one, with the extra funds being disbursed to you in cash. 
• Reverse mortgage: Draws against the equity in your home and is repaid later when you move out, so no monthly payments are required.
• Home equity loan: Receive upfront funds tied to your home equity that you repay with monthly payments at a fixed interest rate. 
• Home equity line of credit (HELOC): Allows you to borrow money as needed during a multi-year draw phase with minimal monthly payments, to be paid back in full later during a repayment phase. 
• Home equity investment (HEI): Offers upfront funds with no monthly payments required until you repay the money with a share of your future home appreciation any time during the 30-year term.

Frequently asked questions

What can you use a home improvement loan for?

Home improvement loans can be used for any type of home repair, upgrade, or renovation project. Lenders place no restrictions on how you use the funds, and many people choose to borrow extra for other needs, such as consolidating high-interest debt.

Are personal loans for home improvements tax deductible?

No. You can only deduct interest paid on loans that are secured by your home, such as home equity loans and HELOCs. 

What credit score do you need for a home improvement loan?

Credit score requirements vary by lender, but in general, you’ll need a credit score of at least 700 in order to qualify for the best rates on a home improvement personal loan.

What are home improvement loan rates?

The average interest rate on a two-year personal loan was 12.33% in August 2024, according to the Federal Reserve. 

Final thoughts

Personal loans are often an afterthought when it comes to home improvement financing plans, but there’s a lot to like about them. 

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If you’re not comfortable borrowing against the equity in your home and you don’t like the idea of your lender being able to foreclose on your property, a personal loan might work better for you. That’s particularly true if you’re not borrowing a significant sum of money and don’t need the long runway that second mortgages offer when repaying your debt.

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If you’d prefer to take advantage of your home equity to cover the cost of your home improvements, consider an HEI from Point. 

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