Choosing between a Personal Loan & Renovation Loan
Renovating your home can be a worthwhile investment, especially if you are looking for a way to increase the value of your home or sprucing it up for rental. However, home renovations seldom come cheap and often cost between $30,000 to $50,000, depending on the extent of renovations. With such a big amount of money, you need to think carefully about how you can finance it in the most cost-efficient way.
Personal Loan or Renovation Loan?
Both loans may look similar to you at first glance – both offer tenures of at least a year to 5 years and provide loans of up to 6X your salary or $30,000. Look into the fine prints and you’d notice a huge difference in the amount you end up paying for a personal loan:
Higher interest rates – When it comes to interest rates, you’d see that many financial institutions like to play with numbers. They show you a headline rate but always remember to look at the Effective Interest Rates(EIR). Most personal loans charge a higher interest compared to renovation loans; typically above 10% while you will be able to find a renovation loan that charges around 6% EIF. A 6 % difference for a $30,000 loan will set you back by an extra $1,800 – just for interest payments!
Flat or Rest Rates – Personal loans usually follows a fixed rate but when you look at renovation loans, you will come across two types of rate known as flat rate and rest rate. A flat rate package offers interest charged on the original loan amount while the mothly rest rate calculates interest on the loan outstanding amount.
Restriction on how you can use the money – Personal loans do not usually specify what you can or cannot use the money for but there are restrictions on renovation loans.
You can use the renovation loan for the following type of renovations:
- Electrical and wiring works
- Built-in cabinets
- Painting of walls
- Structural alterations
- Flooring and tiling
- Bathroom fittings
You will not be allowed to use the renovation loans to pay for home furnishings. For that, it’s best if you can use a 0% instalment plan on your credit card or take up a separate furnishing loan.
Some Ways to Save On Renovation Loans
Taking a loan should be your last resort due to the cost of borrowing. If the problem you have is with the management of cashflow rather than not having the money to pay, ask for instalment payments with your contractor.
Some banks also offer a discount rate for clients who have an existing home loan with them as a reward for their loyalty. Do check with your bank for these rates.
As with other loans, there are a number of fees and charges payable for your loan. Some of the common ones are listed below:
- Processing fee
- Administrative fee
- Pre-payment charges
- Full redemption fee
- Cashier’s orders: banks usually offer a set number of free cashier’s orders, after which you’d need to pay.
- Late payment fee
Be aware of these charges and do your best to avoid them!
So if you’re looking for the best Home Loan, then check out our Mortgage comparison tool.