Best Home Improvement Loans of February 2023

What is a home improvement loan?

A home improvement loan is an unsecured personal loan that you use to cover the costs of upgrades or repairs. Lenders provide these loans for up to $100,000. A home improvement loan comes in a lump sum, and you repay it in monthly installments, usually over two to 12 years.

Because you don’t use the house as collateral for this type of loan, the interest rate is based on information like your credit and income. If you can’t repay a home improvement loan, your credit will take a hit.

Home improvement loans vs. equity financing

A home improvement loan makes sense if you don’t have enough equity in the home or don’t want to use it as collateral. Equity is the difference between the home’s value and the amount owed on your mortgage.

If you have equity, you could get a lower monthly payment on a home equity loan or line of credit, but the lender may require an appraisal before approval.

» MORE: Personal loans vs. home equity loans

Home equity loan

Home equity loans come in lump sums and have fixed interest rates, so monthly payments never change. You repay this loan in monthly installments on a term of up to 15 years.

Compare to personal loans: Home equity loans work similarly to personal loans, but they often have lower rates and longer repayment terms.

» MORE: NerdWallet’s best home equity loans

Home equity line of credit

A HELOC is an open credit line that you draw on as needed during a renovation and only pay interest on what you borrow. This is a variable-rate option that works best if you don’t mind a fluctuating monthly payment and need more borrowing flexibility.

Compare to personal loans: A HELOC lets you borrow at any time over a period of about 10 years, which can be ideal for long-term projects or unexpected expenses. A personal loan offers a one-time cash influx.

» MORE: NerdWallet’s best HELOC lenders

Home improvement loan pros and cons

Here are the pros and cons of using personal loans for home improvement projects.

Pros

• Payments are fixed. Personal loans have fixed monthly payments, so you can reliably budget for them.

• Funding is fast. Online applications typically take a few minutes, and funds are often available within a day or two, while funds from a HELOC or home equity loan can take a few weeks.

• No collateral required. Unlike an auto or home loan, unsecured personal loans don’t require collateral, so the lender can’t take your possessions if you don’t make the payments.

Cons

• They can have high rates. Since the loan is unsecured, the interest rate may be higher than on a home equity loan or home equity line of credit, which typically have rates in the single digits.

• No tax benefits. You can’t claim a tax deduction on the interest on personal loans as you might be able to do with mortgage interest.

How to compare home improvement loans

Shopping around and pre-qualifying can help you find the loan with the best rate and features. These are a few important features to compare among home improvement loans:

• Annual percentage rates: APRs represent the entire cost of the loan, including any fees the lender may charge. If you’re a member of a credit union, that may be the best place to start. The maximum APR at federal credit unions is 18%.

• Loan amount: Some lenders cap amounts at $35,000 or $40,000. If you think your project will cost more than that, look for a lender that offers higher loan amounts.

• Loan term: A loan with a long repayment term may have low monthly payments, but you’ll pay more interest over the life of that loan than one with a shorter repayment term. You can use a home improvement loan calculator to see estimated payments on loans with different terms.

• Ability to add a co-signer or co-borrower: Some lenders let you add a co-signer or co-borrower to your loan application. Adding someone with better credit or higher income to the loan application may help reduce your APR or increase the amount you can borrow.

Home improvement loan rates

Current home improvement loan rates are between 6% and 35.99%. Lenders decide your rate on a home improvement loan primarily by using your credit score, credit history and debt-to-income ratio.

Here's what personal loan rates look like, on average:

» MORE: Compare best personal loan rates

How to get a home improvement loan

To get a home improvement loan, first compare lender offers with other options, check your rate and monthly payments, prepare documents and apply.

Let's break down those steps:

1. Compare options. Compare the best home improvement lenders against each other and with other financing options, like credit cards and home equity financing. You're looking for the one that costs the least in total interest, has affordable monthly payments and fits your timeline.

2. Check your rate and monthly payments. Try to set your project's estimated cost before this step. Many online lenders and some banks let borrowers pre-qualify to see potential personal loan offers before applying — but you'll be asked how much you want to borrow. The process involves a soft credit pull.

3. Prepare documents. Once you've chosen a lender, gather the documents you'll need to apply. This can include things like W-2s, pay stubs, proof of address and financial information.

4. Apply. You may have to apply in person at smaller banks and credit unions, but larger ones and online lenders usually offer online applications. Many lenders can give you a decision within a day or two of applying. After that, expect to see the funds in your bank account in less than a week.

How to use a home improvement loan

Unsecured loans can cover almost any purchase. How much you’ll need will vary based on your location, home size and how extensive your plans are.

Here are some common projects and how much you could pay for each, based on the most recent cost estimates available.

Other types of home improvement financing

Federal programs

Some government programs can help pay for a home renovation. The Federal Housing Administration has two programs: Title I loans and Energy Efficient Mortgages. You can search for a “Title I Property Improvement” lender in your state on the HUD website.

When it’s best: Consider applying if your project and finances meet the criteria outlined by these programs. They can help make upgrades more affordable.

Cash-out refinancing

You can refinance your existing mortgage into a higher loan amount and use the difference to pay for your renovation.

When it’s best: Consider this option if current mortgage rates are lower than the one you're paying now.

Credit cards

You can strategically use a credit card to cover the cost of your upgrades. Rewards cards can get you paid as you upgrade, while a card with a 0% introductory APR can cover short-term home renovations.