How Do Home Improvement Loans Work?

Home improvement loans allow you to fund renovations and home improvement projects. There are several different types of loans you can borrow to fund work around the house, such as personal loans, home equity loans, HELOCs, and government loans.

How do home improvement loans work? You’ll get a lump sum upfront, and you’ll then repay the loan with interest through monthly installments in most cases. Read on to learn more about the types of loans available, the pros and cons, how to apply, and eligibility requirements.

5 Best Home Improvement Loans

We selected our top five recommendations for the best home improvement loans based on factors like loan amounts, annual percentage rates (APR), term lengths, credit score requirements, and customer reviews.

1. LightStream- Best for Larger Loan Amounts

• Loan Amounts: $5,000 to $100,000
• APR: 6.99% to 25.49%
• Repayment Terms: 2 to 12 years
• Minimum Credit Score: 660

LightStream is our top choice for home improvement loans because of its low starting interest rates, large loan amounts, and longer terms of up to 12 years.

Pros

• Autopay rate discounts
• No loan origination or application fees
• Longer repayment terms of up to 12 years

Cons

• No prequalification option
• No due date flexibility

2. Navy Federal Credit Union- Best for Military Members

• Loan Amounts: $250 to $50,000
• APR: 7.49% to 18%
• Repayment Terms: 1 to 5 years
• Minimum Credit Score: NA

Navy Federal Credit Union is a good choice for existing members due to its low maximum APR (of 18%) versus other lenders, flexible qualification requirements, and variety of loan options.

Pros

• Fast funding
• Secured and joint loan applicant options
• Rate discounts

Cons

• Only available to credit union members
• No prequalification option
• No due date flexibility

3. Wells Fargo- Best for Flexible Payment Dates

• Loan Amounts: $3,000 to $100,000
• APR: 7.49% to 23.74%
• Repayment Terms: 1 to 7 years
• Minimum Credit Score: NA

If you’re an existing Wells Fargo customer, you may be eligible for larger loan amounts and rate discounts. You also have the option to change or choose your payment date.

Pros

• Flexible payment dates
• Rate discounts
• Fast funding

Cons

• Available primarily to existing customers
• No joint loan options

4. Discover- Best for Good Credit Borrowers

• Loan Amounts: $2,500 to $40,000
• APR: 7.99% to 24.99%
• Repayment Terms: 3 to 7 years
• Minimum Credit Score: 660

Discover offers loans to borrowers with good to excellent credit (FICO score of 670 and above). The lender offers perks like a mobile app and a 30-day money-back guarantee on personal loans (if the borrower returns 100% of loaned funds), but there are no rate discounts.

Pros

• No loan application or origination fees
• Easy-to-use mobile app
• Can change your payment due date
• Money-back guarantee if you change your mind within 30 days
• No prepayment penalty, if you decide to pay your loan off early

Cons

• No rate discounts
• No joint loans
• You may have to pay late fees
• Low maximum loan amount compared to other lenders

5. Upstart- Best for Bad Credit Borrowers

• Loan Amounts: $1,000 to $50,000
• APR: 7.80% to 35.99%
• Repayment Terms: 3 or 5 years
• Minimum Credit Score: 300

Upstart is our top pick for home improvement loans for bad credit because the lender offers loans to borrowers with bad or no credit history. Other perks include fast funding and flexible payment dates.

Pros

• Prequalification option available
• Flexible payment dates
• Fast funding
• Low/no minimum credit score required for approval

Cons

• No joint loans
• May have to pay an origination fee
• Only three or five-year repayment terms available  
• Very high maximum interest rates for its riskiest borrowers

What are Home Improvement Loans, and How Do They Work?

Home improvement loans are loans that are used to finance upgrades, repairs, or renovations to a property. These loans can be unsecured or secured.

How do home improvement loans work? It involves borrowing a lump sum amount and repaying it with interest in monthly installments. If you’re applying for a secured loan, such as a cash-out refinance, home equity loan, or home equity line of credit (HELOC), your home serves as collateral. This means that the lender can foreclose if you default on the payments.

Unsecured home improvement loans don’t require collateral, but you’ll typically pay a higher interest rate and receive lower loan amounts than secured loans.

Different Types of Home Improvement Loans

There are several different types of home improvement loans, including secured and unsecured loans. Here are a few options to consider:

• Home Equity Loans: Home equity loans allow you to borrow against the equity you have in your home. These loans have lower fixed interest rates compared to personal loans, but you risk foreclosure if you default. You can use the funds from the home equity loan for home improvements, renovations, and repairs.
• HELOC: A home equity line of credit (HELOC) is a line of credit that is secured against the equity of your home. HELOCs typically have variable interest rates because you can borrow and use funds as needed during the draw period up to the approved limit.
• Personal Loans: Lenders offer secured and unsecured loans that are easier to qualify for than most other types of loans. These loans are also flexible and are often accessible to bad credit borrowers.
• Cash-Out Refinance: If you qualify for a lower interest rate than your existing mortgage rate, you can refinance it by taking out a larger mortgage amount against your home (if it has increased in value) and use the additional funds (by “taking the cash out”) for home improvement.
• FHA 203(k) Renovation Loan: FHA 203(k) loans allow you to purchase and renovate your home at once with a single loan.

Pros and Cons of Home Improvement Loans

Like with any other loan, it's always a good idea to understand how to finance a home remodel, weighing the pros and cons before you borrow to ensure it makes sense for your financial situation.

Pros

• Helps you finance large renovation or rehabilitation projects
• You may be able to add value to your home through home improvements and energy-efficiency upgrades
• Interest paid on home equity loans and HELOCs may be tax-deductible if you use the funds for qualified improvements
• On-time payments may help you improve your credit score

Cons

• You risk losing your home if you default on a secured home improvement loan
• Your credit may take a hit if you don’t keep up with payments
• You may add too much to your debt load if you borrow more money than you can afford to pay back each month or borrow more than you need to make your planned improvements.

How To Compare Home Improvement Loans

Consider these factors when comparing home improvement loan offers:

• Credit requirements may vary for each lender, so check to see which lender will be easier to qualify for.
• Check the minimum and maximum loan amounts to ensure you’ll be able to borrow enough to fund your project.  If you’re planning extensive home improvements that may take weeks or months to complete, only borrow what you need as you go along.  Use a line of credit to draw what you need as you go, or try to borrow only what you need now to start your project(s) and then borrow the rest later when you’re ready to start the final portion of your renovations. 
• Compare the annual percentage rates (APRs) offered by different lenders. Prequalify with multiple lenders with a soft credit check to find the best rates you can get.
• Compare loan terms offered by different lenders and ensure your monthly payments are affordable while keeping your repayment period as short as possible to avoid paying too much in interest charges.  

How To Qualify for a Home Improvement Loan?

The eligibility requirements for home improvement loans vary by loan type and lender. However, there are some common factors that lenders look at, such as:

• Income: Lenders will check to ensure you have sufficient income to cover your new loan payments along with your current expenses.
• Credit Score: Lenders will also take a look at your credit score(s) with one or more of the major credit reporting agencies (Experian, TransUnion, and Equifax) to ensure you meet their minimum credit score requirements.
• Collateral: If you’re applying for a secured loan like a home equity loan or HELOC, you’ll usually need at least 15% to 20% equity in your home.
• Debt-to-Income Ratio: Your debt-to-income (DTI) ratio measures how much of your monthly income goes towards debt payments. Lenders use this ratio to determine whether you can afford the loan.  Typically, lenders will require that your Total DTI ratio is less than 43%.

How To Get a Home Improvement Loan

Here’s the standard process and the steps you’ll need to follow to get a home improvement loan:

1. Review your credit report and determine how much you need to borrow.
2. Shop around and compare the terms and rates offered by multiple lenders. This will allow you to find the lowest rates.
3. Prequalify with a lender to get a better understanding of what rates you qualify for.
4. Gather your documents, fill out the loan application, and submit it.
5. Wait for the loan approval and receive your funds.

Where To Get a Home Improvement Loan?

You can get a home improvement loan from a bank, credit union, or from any one of several credible online lenders. You may also be able to get a renovation loan from government agencies like the Department of Veterans Affairs (VA) and the Federal Housing Administration (FHA).

Compare Your Options To Find the Best Home Improvement Loan Rates

Home improvement loans can be a good option when you want money for important home repairs but don’t have enough savings set aside to pay for them. Some loans, like HELOCs and home equity loans, are secured and offer much lower rates than unsecured personal loans but come with a risk of foreclosure if you default.

Homeowners can also get unsecured loans if they don’t want to tap into the equity of their home. Make sure you compare multiple financing options to find the best rates before you start the application process.