Best Home Improvement Loans of June 2021

What is a home improvement loan?

A home improvement loan is an unsecured personal loan that you use to cover the costs of home upgrades or fixes. Lenders provide these loans for up to $100,000. Unlike with credit cards or lines of credit, these loans are repaid in monthly installments, typically over a few years.

Because you don’t use your house as collateral for the loan, your rate is based on your credit and income information. If you can’t repay the loan, your credit will take the hit.

Benefits and drawbacks

A home improvement loan can make sense if you don’t have enough equity in your home to cover the project or you don’t want to use your home as collateral.

These loans can be tens of thousands of dollars, making them ideal for bigger projects, while a credit card may be ideal for smaller DIY projects.

Here are some things that are unique to personal loans for home improvements:

• 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.

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

• Fast funding options. Online applications typically take a few minutes, and funds are available within a day or two at some lenders, while funds from a HELOC or home equity loan can take a few weeks.

• 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.

» MORE: Compare green home improvement loans

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 between 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 will 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.

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 finally 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 by 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. You can compare rates and monthly payments from multiple online lenders at once by pre-qualifying on NerdWallet.

3. Prepare documents. Once you've chosen a lender, gather the documents you'll need to apply. This can include things like W-2s, paystubs, 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 between one and seven business days later.

» GET STARTED: Check your rate with multiple lenders on NerdWallet

Home improvement loan rates

Current home improvement loan rates are between 5.99% 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:

Source: Average rates are based on aggregate, anonymized offer data from users who pre-qualified in NerdWallet’s lender marketplace between Jan. 1, 2020, and Dec. 31, 2020. Rates are estimates only and not specific to any lender.

» MORE: See the best personal loan rates

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.

Americans spent an average of $18,216 on room additions and renovations in 2019, according to the most recent available data from the U.S. Census Bureau’s American Housing Survey.

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

» MORE: How much do popular home improvement projects cost?

Other types of home improvement financing

You have a long list of options to finance your project, including a home equity loan or line of credit, cash-out refinancing or an unsecured home improvement loan to pay for your home improvement project.

» MORE: Take our quiz to find the right home improvement financing option

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.

Home equity loans and HELOCs

HELOCs have variable rates and allow you to borrow as you go and repay only what you borrow. A home equity loan, on the other hand, has a fixed rate and comes to you in a lump sum that you repay over time.

Both options typically have lower monthly payments than personal loans, with repayment terms up to 20 years. These home equity options use your home as collateral, meaning you could lose your house if you fail to repay.

Compare home equity loans and HELOCs to decide which fits best with your plans.

When it’s best: If you have equity in your home, you want a low rate and longer repayment period, and you don’t mind putting your house up as collateral.

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.