Holly Bennett
Rhiannon Philps
It can be possible to get a loan to cover the cost of home improvements if you have a bad credit history. But is it worth improving your credit score first? Here are some options.
Can you get a home improvement loan with bad credit?
If you have bad credit, you are likely to find it more difficult to get accepted for a loan. However, there are lenders that can offer loans for home improvements to people with bad credit.
Having a poor credit history, perhaps through missed loan repayments, may affect a lender’s decision and the terms you are offered. That’s because your credit record is a picture of your reliability when it comes to keeping to credit agreements. Lenders see a bad credit history as an increased risk to them, as it indicates that you’ve previously struggled to make repayments on time.
If you have bad credit and are eligible for a loan, you may face higher interest rates and not be able to borrow as much compared to people with a better score.
As well as your credit history, lenders will consider other factors, including your income, other debts, and whether you own your home. This means having bad credit may not necessarily stop you getting a loan if you meet the other requirements of the lender.
Even if you are eligible for a home improvement loan, it’s always worth considering if it’s the right option for you. For example, if your planned improvements are essential or will add value to the property, it may be worth taking out a loan, as long as you can afford the repayments.
If your plans aren’t urgent, you may want to wait before getting a loan. This could, to give you an opportunity to improve your credit score and potentially access more competitive rates in the future.
» MORE: Guide to home improvement loans
Types of bad credit home improvement loans
There are a few options that you could consider to fund home improvements if you have bad credit. The best way to fund home improvements will always depend on your finances, how much you’re looking to borrow, and whether you can afford the repayments.
Secured loans
A homeowner loan is a secured loan, where your home acts as security for the money you are borrowing. You may have a higher chance of securing a loan with bad credit if you opt for a secured loan, as lenders ‘take comfort’ in the fact that they can repossess your property to get their money back if you fall behind on repayments. However, this means that, while a secured loan could be easier to get with bad credit, you risk losing your home if you can’t pay it back.
A second charge mortgage or a further advance from your mortgage lender are both types of secured loans. Secured loans tend to offer larger amounts of money than unsecured loans, over longer periods. Though the longer the loan term, the longer you will be paying interest.
Unsecured loans
You may find it harder to be accepted for an unsecured loan if you have bad credit as you are considered to pose a higher risk to lenders. However, there are some lenders that specialise in bad credit personal loans.
This type of loan isn’t secured against your home or other assets, which reduces the risk to you because your home isn’t used as collateral. But as the lender doesn’t have an asset to fall back on if you default on payments, it may charge you higher interest rates than on a secured loan.
You may also not be able to borrow as large a sum as you could get with a secured loan.
Guarantor loans
Using a guarantor might open up more borrowing options if you have a low amount of equity in your home, or haven’t yet managed to build up a credit history. A guarantorThis might be a family member or a close friend. Applying for a loan with a guarantor could help improve your chances of acceptance and offer the chance to improve your credit score if you keep to your repayments.
If you have a guarantor loan and can’t meet repayments, your guarantor is legally obliged to step in and pay. You and the guarantor should be clear about what you’re agreeing to and what happens if you can no longer afford to pay it back. You will both want to be confident that you can afford the repayments.
Interest rates on guarantor loans can be higher than for other types of loans. However, if you have a bad credit score, guarantor loans may offer lower rates than if you applied for an unsecured loan without a guarantor.
Credit union loans
Some credit unions offer home improvement loans that could be an option if you have a bad credit history. The interest on credit union loans is capped, so it could be a cheaper option compared to loans from some other providers.
However, different credit unions will have different criteria for their loans, so you should check the terms to see if you are eligible to apply for one.
If you’re not already a member of a credit union, you can find one here.
How to get a home improvement loan with bad credit
Before approaching a provider or broker for a bad credit loan, work out how much you need to borrow for your planned refurbishments and calculate what you can afford to pay each month.You’ll need to be confident that you can make these regular repayments for as long as the loan lasts, considering other outgoings and possible costs.
You can find loans for home improvements directly with a lender or through a specialist broker. As having a bad credit history will affect your chances of acceptance and the rates you’re offered, a broker can help you focus on providers and products you’re most likely to be eligible for.
Comparing loans across providers can also help you find the best deal with the most affordable rates for your own personal circumstances.
» MORE: Loan application tips
Alternatives to a home improvement loan
If you’re looking to find other ways to get the funding you need, you could consider:
Borrowing more on your existing mortgage
One option is to ask for a further advance from your lender to borrow money for home improvements. This increases your mortgage debt to release the funds you might need. The interest rate on a further advance is usually different to the rate you pay on your original mortgage debt, but it may be low compared to other loans. There may also be a minimum lending amount for home improvements.
Some lenders offer lower further advance rates if you are renovating to make your home more energy efficient. This might include installing solar panels or upgrading your boiler.
The lender will run a credit check and carry out affordability checks, which could affect its decision. A further advance is unlikely to be an option if you are in mortgage arrears.
If you are considering borrowing more on your mortgage, be clear about any fees the lender will charge.
Remortgage
It’s also possible to remortgage to release funds to pay for home improvements. When you remortgage, you could apply to borrow more than you owe and use the excess amount for your refurbishments.
If you remortgage, bear in mind that while a longer mortgage term may help with affordability, it will increase the amount of overall interest you pay. It’s also worth noting that lenders can be reluctant to extend mortgages for homeowners who are beyond a certain age.
Before making a decision, make sure you calculate the cost of any early repayment charges and application fees you may need to pay to remortgage to a new deal.
Using an overdraft or credit card
If you only need to borrow a small sum of money, you could consider using a credit card or an agreed bank overdraft as a short-term way to fund your home improvements. But only consider these if you are in a position to pay off the debt in full before you are charged interest and know you won’t go above the credit limit. If you don’t already have these types of credit arrangements in place, a bad credit score will make it harder to be approved.
A credit builder card may be an option if you find it difficult to be accepted for a standard credit card. Using these sensibly can help you improve your credit score, but they can offer higher interest rates and lower credit limits.
Borrowing from friends and family
This isn’t an option for everyone and has potential drawbacks, but you could consider borrowing the money from those close to you.
Loans between friends and family can help avoid high interest rates that might come with loans from lenders or other types of debt. You won’t need to have a credit check, either. Just make sure you put something in writing and agree on a workable repayment plan if the money is a loan rather than a gift.
Is timing important for loan applications?
It can be. It might be a good idea to hold off on your home improvements for a few reasons:
You can improve your credit score first
If your home improvement plans aren’t urgent, it may be worth waiting and seeing if you could improve your credit score.
A good credit history can help open up lower interest rates and increase your chances of being accepted for a loan (and your choice of lenders). There are a few ways to improve your credit score. These include paying your debts on time and even small changes, such as registering to vote or checking for errors on your report. Bear in mind that interest rates may change in the time it takes to improve your credit score.
You can avoid an early repayment charge
Some mortgage deals have an early repayment charge where you pay a fee for remortgaging before your current deal is due to end. It’s usually a percentage of how much you still owe on your mortgage loan, so it can be substantial. You may want to time a remortgage to avoid this charge.
You don’t harm your credit score
It’s best not to apply for multiple credit agreements in a short space of time. When you make a loan application with a lender it will run a hard credit check. This will appear on your credit report and be visible to other lenders. Too many applications and refusals suggests to lenders that you are a higher risk to lend to. It could also further affect your credit score.
Try to only apply for loans you could be accepted for and consider using a specialist broker to help find these.
Many providers will allow you to check your eligibility for a loan before applying. This can indicate the likelihood of you getting approved for a loan and it only involves a soft credit check, which won’t appear on your credit report.
WARNING: Think carefully before securing other debts against your home. Your home may be repossessed if you don’t keep up repayments on a loan or any other debt secured on it.
Image source: Getty Images
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