Should I Use a Personal Loan for Home Improvement?

If you’re looking to make updates to your home, one common way to do that is to use personal loan for home improvement projects. Americans spend about $400 billion a year on home improvements, according to the Joint Center for Housing Studies at Harvard University1.

Are you ready to tackle a project, maybe a do-it-yourself undertaking or a job for professional contractors? Plenty of financing options await you. A personal loan for home improvement projects may offer several benefits.

Is a home improvement loan a personal loan?

When people talk about home improvement loans, also referred to as home repair or renovation loans, they can be talking about personal loans. This type of loan offers a great deal of flexibility. You can use a personal loan for home renovation to add a bedroom – or almost any job around the house. Once the lender approves a personal loan, you can use it for a wide variety of goals. People also use personal loans for debt consolidation, vehicle purchases, medical bills, vacations, weddings and other needs.

Personal loans are unsecured, meaning the borrower doesn’t have to provide collateral as security to the lender in the event the borrower defaults on the loan payments.

Borrowers receive the loan amount in a lump sum and the loan terms don't change. With a TD Fit Loan, the interest rate and term are fixed, so you know when you sign the loan agreement how much you will pay each month.

It’s important to note that while an unsecured personal loan doesn’t come with the risk of foreclosure on your home (the collateral) if you don't pay your mortgage payments, unsecured lenders do have other legal remedies to pursue repayment of a defaulted personal loan. Those legal remedies could result in judgments or liens on a property, which could then impede selling or refinancing.

Other types of home renovation or repair loans

Other common options for financing a home renovation project are based on the equity a homeowner has. Equity is the value of a property minus what is owed on the mortgage. For example, if your house is valued at $300,000 and you still owe the mortgage lender $200,000, you have $100,000 in equity. Equity increases as the mortgage loan is paid down and when the property value increases, such as when real estate inventory is low and there is a seller’s housing market.

Home equity loans, like TD Bank's, are secured loans that let homeowners borrow against their home equity. Lenders call these second mortgages, and they accept the equity as the collateral. Another option based on equity, the home equity line of credit (HELOC), resembles a credit card account. The TD HELOC, a secured loan, provides a revolving line of credit, like a credit card, and can be used for a variety of projects.

It's important to consider the pluses and minuses of personal loans vs. home equity loans and lines of credit as you plan your home improvement project.

Home improvement loan rates and fees

Banks, credit unions, online lenders and other creditors can charge origination fees, appraisal fees, and other closing costs for home equity loans and HELOCs.

The same goes for another equity-based loan, the mortgage cash-out refinance. With this type of loan, including you may refinance your mortgage for more than what it would take to pay it off and take the difference in cash.

These loans typically have lower interest rates than personal loans because you use your house as collateral. In fact, mortgage rates are generally among the lowest interest rates a consumer can get. These loans may have higher fees than unsecured home improvement loans.

How to find the best personal loan

To choose your loan funding for home renovation, you must compare several factors and find the total cost of borrowing. It's time to do some comparison shopping if you want to find the best home improvement loans.

The first thing you’ll want to look at are the interest rates of the renovation loans. Lenders charge interest to be compensated for letting you use their money. You pay a percentage of the principal, which is the amount borrowed, or still outstanding.

For example, if you take out a five-year personal loan for home repairs for $10,000 at 8.24% interest, you will pay a total of $12,230. That means the price of borrowing the money is about $2,230. If the lender charges any prepaid finance charges (a type of fee that doesn't cover a third-party cost), those would be reflected in the annual percentage rate (APR), which gives the total cost of the loan as a percentage.

Comparing home renovation loan APR and total costs

When comparing, use the APR and the interest rate. But be sure to calculate how much you will pay in total over the life of your home repair loan.

You’ll want to look at the loan term, which is the length of time you select to pay off the loan. TD Bank offers personal loans for 36-60 months. Short-term loans may have larger monthly payments and lower total costs of borrowing than long-term loans. Depending on your budget, you might choose a longer term with smaller monthly payments, even though you may pay more in interest over the years (assuming you pay only the installment amount and nothing more).

How can you get a home improvement loan?

Once you decide on the best type of loan for your home renovation, you’ll need to do some research.

First, check your credit score and review your credit report from the big three credit agencies: Experian, Equifax and TransUnion. Make sure there are no mistakes. If you see any, ask to have them corrected. Identify the factors that are costing you points and take steps to correct them.

Now it’s time to figure out how much you need to borrow for your project Come up with your best estimate on the complete cost of your home improvements.

Some lenders allow you to check your rate and term options for a loan for home renovation on their website (TD Bank's personal loan options). Often, this check is a soft credit inquiry on your credit report that won't affect your credit score.

Most lenders accept online applications. Depending on your credit history and other factors, the lender might approve the loan quickly. TD Bank's personal loan may be funded in as little as one day, but could take longer if additional documentation is needed.

Time for a project

Getting a personal loan for home improvements may make daily living more enjoyable. It also can give you the satisfaction of knowing your home might have increased in value. Explore your options, including TD Bank’s TD Fit Loan, a low-interest personal loan that doesn’t require collateral.

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This article is based on information available in September 2022. It is for general informational purposes only. It is not intended to provide specific financial, investment, tax, legal, accounting, or other advice and should not be acted or relied upon without the advice of a professional advisor. A professional advisor will recommend action based on your personal circumstances and the most recent information available.