Renovation Loan vs Personal loan

In life, there are many circumstances where people end up requiring large sums of money for various purposes. The need is for financial assistance from reliable lenders who can provide the much needed support. That is where loans come in. Offered by financial institutions like banks and private lenders alike, loans are an important part of the modern economy and an equally vital tool that help people deal with emergency situations and plan out future financial endeavors.

Personal Loans

The most common type of loan people apply for is the Personal loan. When it comes to requiring large sums of money for specific purposes people usually take out mortgages or student loans but the beauty of personal loans is that they are not bogged down by a singular use. A person can take out a personal loan for a variety of purposes, whether it is consolidating other debts, medical bills, wedding expenses, vacations, moving, etc. These versatile loans can help to pay through various situations.

Renovation Loans

In more specific examples of loan, requirements are home renovation loans. Over time everyone needs to get some work done around their house. Whether it be to fix plumbing, the electrical systems, getting the roof fixed, or upgrading to more energy-efficient materials. The requirements are varied and depend on the specific needs of individual borrowers. Renovation loans allow homeowners to get closer to their ideal of the perfect home by paying the way for it. Without renovation loans, getting more complicated work down around the house would be extremely financially challenging for most people, in the worst-case people would need to dip into their savings.

>>More: When should you consider a home Renovation Loan?

Using renovation loans

Like their name, renovation loans are very straightforward in their purposes and process. The cost of renovating a simple room without too many fixtures, such as a bedroom can easily start between $7,000 to $10,000. Naturally, the amount only goes up for rooms with electrical and plumbing installed. It is a very hefty challenge for someone to instantly pull out such sums from their accounts or their savings. Which is where renovation loans shine. These loans allow people to take a loan on the required amounts and make payments towards the loan in small installments. It is easier for a person to make small monthly payments rather than risk losing access to their savings in one go, even if it might be due to an emergency.

But problems aren’t the only time people think of renovation loans, since they do serve the purposes of having changes made around the house. They are also used because people want to upgrade their living standards or change the aesthetics of the house. Renovation loans play a great role in allowing people to turn their property into one that best fits their ideal. These loans can change how people feel about their homes, from the inside and out.

What about personal loans?

What happens if someone wants to renovate their home but also has additional things they want to do which do not get coverage under renovation loans? For example, perhaps someone would need to renovate their property but also cover costs for a family vacation. This type of situation is where personal loans take the stage and work their magic. Personal loans are versatile exactly because they allow people to use the money to do more than one thing at a time. These loans are appropriately named since their purpose is whatever the borrowing person needs them to do.

These days it is also possible to quickly obtain funds for a personal loan through applying with online lenders. The best part is the interest rates on personal loans can be lower if the applicant has a good credit score and a history of responsibly handling their finances. For such a person, personal loans can open doors to great financial possibilities, as long as the money is spent wisely, with the future of repayment in mind.

Loan eligibility criteria

The main eligibility requirements for all loans are the same. They all require you to have the ability to take on the loan, have the kind of finances that let you repay the loan and you should have a good history of handling your finances. Lenders approve loans based on the following:

Credit Score: Credit score reports are generated based on a person’s handling of different financial situations. Every time someone takes out a loan or uses a credit card, makes repayment of bills, or even misses payments. All this different information will appear in their credit score report.

The way to keep credit scores in good shape is to never take on any more debt than necessary and be sure about paying it back in the time that it is due. Also helpful, is if a person is regular about making their payments, especially on credit cards.

Debt to Income (DTI) ratio: DTI ratio is calculated by dividing the gross monthly income against the person’s existing debts (excluding federal taxes). The value produced will be the Debt to Income ratio. This value allows lenders to estimate their ability to repay loans and also check whether they have the capacity to take on any more debt than already under. In general, the highest accepted DTI ratio is 43%, any more than this is considered very high risk for the lender and implies chances of the borrower defaulting on the loan.

Employment history: It is an understood fact in the loan industry that a borrower that has been working in their job steadily for long periods is more likely to make good on repayment promises of their debt. The commitment to stick at a company for years is considered an indication of someone with responsible attitudes towards their finances.

Personal loan vs Renovation loan: Maximum amount

Loan amounts and how the money is used are two of the main differences that set apart personal loans from renovation loans.

Considering the nature of personal loans to be used for multiple purposes and being useful for all kinds of situations, the amount for the loans can range from $1,000 to $100,000 and some cases even more. However, the exact value depends on how much a person wants to take out, their credit score, and their DTI. To take out a personal loan, the borrower must be of 21 and above with an active income and a steady job.

The amount taken out for the renovation loan is based on the market value of the property after the renovations, which more than covers most instances of renovations and repairs required in a home. And since they are specific for the home-only use, it is a requirement for these loans that the borrower owns the property they want to take out the loan for or at least be an immediate family member of the homeowner. Aside from these specifics, the other requirements for renovation home eligibility (credit score, age, income, etc.) are the same.

Making a Choice

When it comes to choosing which loan to rely on, it is a good rule of thumb to use loans for things that they are specific to. For example, even though it is possible to use a personal loan to cover home renovation, it would be best to just use a renovation loan for that purpose. The terms of the loans vary by situation and lender but the terms are based on the role they are meant to play.

It is possible someone wanting to use a personal loan for home renovation might end up borrowing more than they should have or less than the amount they actually needed for the work. Before taking out a loan it is best to do research and figure out which loan would work out best for a specific situation.

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