Why you should never take a personal loan for home renovations

Renovating your home is always an exciting thing to look forward to, with the promise of a refurbished and better looking home to come back to.

That is, of course, until everyone sees the bill.

There are a variety of ways that you can finance your home renovations, but taking the wrong approach of getting a personal loan or a line of credit could end up costing you thousands more.

This is why a renovation loan is so important, and here are the differences you need to know about:

Renovation loan vs. personal loan

Personal loans and renovation loans can appear deceptively similar – they both offer loan tenures that range from 12 - 60 months, and provide loan amounts up to 6X your monthly income or $30,000. In fact, you may see banks advertise their personal loans as a way to finance renovation work with “low interest rates and monthly payments.”

Don’t get fooled.

Once you look at the interest rates of both, it’s obvious which one is the better deal. Here’s why you should avoid taking out a personal loan for your renovation:

• Personal Loans Have Higher Processing Fees: How do you like the idea of having to pay a 1.5 per cent to 4 per cent+ “processing fee” on your personal loan? That’s up to $1,200+ nett of your loan!
• Personal Loans Have Higher Interest Rates: How much higher? Try 3X-4X higher than some renovation loan packages offered by the banks. That adds up to higher monthly repayments and thousands of dollars in extra interest you must pay.

Now let’s take a look at how a renovation loan compares to a personal loan if you want to borrow $30,000 for your home renovation and want to repay it in five years.

5-year personal loan at 7.9 per cent Interest (Flat rate)
Year	Loan amount	Interest per month	Monthly payment
1	$30,000.00	$106.86	$606.86
2		$106.86	$606.86
3		$106.86	$606.86
4		$106.86	$606.86
5		$106.86	$606.86
Total payable amount + interest			$36,411.43

If you are a home loan customer of a particular bank, you may get a slightly better “professional” rate on your renovation loan. That’s the bank’s way of having of rewarding “loyalty.” Some banks might even offer a “promotional” rate for five years.

Again, don’t get fooled! Even this “deal” is costly, as the total amount you’ll have to pay back on a $30,000 renovation is $36,411.43! That’s $6,000 in interest! On the other hand, a good renovation loan will come with an interest rate that’s well below 4 per cent.

*Note: Not all renovation loans are created equal, as interest rates can vary from bank to bank. You can save yourself time doing research and get quotes from the best renovation loan rates here.

Use a personal loan for anything BUT renovations

As you can see, there’s a huge difference between renovation loans and personal loans in terms of how much interest you’ll be paying. But that doesn’t mean you should completely avoid personal loans.

ALSO READ: Bank loans vs licensed moneylender: Which is better?

Personal loans can be a great way to boost your cash flow to get past a short-term financial emergency. You can even use a personal loan to finance a holiday, wedding, or buy a nice gift for your significant other.

It’s also a much better way to pay off your credit card debt with a personal loan (because 24 per cent p.a. is just nuts).

Just remember to exercise prudence and make sure you can afford the monthly repayments. If you’re looking for the latest personal loan rates from all banks you can get them easily with MoneySmart’s Personal Loans Wizard.

This article was first published in MoneySmart.