Compare Home Improvement Loans in December 2024

Home improvement loans aren’t like student loans or mortgage debt, where you take out a loan that can only pay for education or buying a home.  Home improvement loans are any type of personal loan used to make changes to your house. These changes can be cosmetic or required for safety reasons like removing a tree branch that fell onto your roof during a storm.  There are two types of loans available for home improvement: secured and unsecured.

Secured debt requires collateral for approval. One common type of secured debt is a mortgage loan.  With a mortgage loan, your real estate property is an asset attached to the loan as collateral. It means that if you default, or can’t pay the loan, the lender takes the property to make up for the loss.

Another type of secured debt is a credit card. Secured credit cards are most common for people looking for ways to build credit.  With a secured credit card, cash is put into a savings account with a bank to serve as collateral for a loan. The money in the account can’t be accessed until the end of a term set by the lender.  The lender can collect the cash at any moment if you fall behind on payments.

Secured debt might seem like a win-win situation, but it comes at a higher cost to you than the lender.  You could lose hard-earned cash or your home if you face an unexpected financial crisis. But lenders are more willing to offer secured loans because they are less risky.  Interest rates on secured debts are usually much lower than that of unsecured debt. Lower interest rates mean lower monthly payments.

Another benefit of secured debt is getting access to more jumbo loans. Lenders extend more credit to borrowers who have a guaranteed way to repay if they fall behind on their loan payments.  You can also expect a more extended repayment period on secured debt. Lenders make money on your loan by charging interest.  The lender makes more money on the longer term loans. That is also a perk for borrowers because it means stretching out the loan balance over a longer time and lowering your payments.

Most people think of credit cards when thinking of unsecured debt. Unsecured debt isn’t attached to an asset.  If you can’t repay the debt, the lender loses money. That makes unsecured loans much riskier for lenders than borrowers.

The pros of unsecured loans are that there’s no risk of your losing personal property or valuables if you default on the loan. You can also expect a shorter repayment period, which is better if you have a reasonable interest rate on your loan.

But the riskier loan comes at a higher cost to borrowers. Because lenders have no guarantee of repayment, getting a low-interest rate is more difficult unless you have excellent credit.  Lenders are also less likely to provide unsecured loans in large amounts. If you don’t have good credit, it’ll be hard to qualify for an unsecured loan at all because lenders don’t have proof that you have proper financial management.