For a homeowner there is nothing quite as thrilling as home improvement. You can picture the outcome of the renovation – an enhanced aesthetic, better functionality, added value. But, after obtaining a quote, you could get a nasty shock when you see the price.
Some people can afford to wait and save up. That’s a good idea, but for others, waiting isn’t an option. Sometimes the home is uninhabitable – or too uncomfortable – without the completed renovation.
Is it worth reaching for the credit card? Often the limit is enough to cover the quoted cost. Should people consider a new card? With a good credit rating banks are often willing to oblige. While on the surface a credit card payment may seem like the quickest, most convenient option, it is worthwhile taking the time to investigate a personal loan – it could prove a financially advantageous exercise.
Here are some factors worth thinking about when deciding how to finance your home renovation:
Long-term versus short-term
Most personal loans include a fixed repayment option. This will help reducethe chance of any unwanted surprises as the rate you pay and the loan term you choose will not change.
If you have a low rate credit card and have the discipline to pay off more than the minimum repayments, this might be an option. If not, however, then a personal loan might be best if you feel you’re going to need an extended period of time to pay-off the renovation.
Sometimes the decision is made for you
Most personal loan lenders will have a set minimum borrowing amount. So, if you’re unsure whether the cost of the renovation warrants a loan, checking a lenders’ minimum borrowing amount (usually readily available on their websites) can help with this decision. Maybe, in the instance of a smaller renovation, using your credit card – with the mind to pay it off as soon as possible – could be more practical.
Anticipating the unexpected
No matter if it’s a deck extension, new kitchen, or creating the perfect open-plan living space, sometimes renovations don’t go according to plan. An unexpected hurdle could present itself mid-project requiring additional, unbudgeted expenditure. Most personal loans will include an option to increase the borrowing amount if necessary. Keep in mind that approval will depend on the existing loan amount, and your capacity to repay it.
Regardless of whether you utilise a personal loan or credit card, of overarching importance is ensuring not to overcapitalise your home. Be conscious of overstepping the “value add” mark – spending more on the home than you’re likely to receive back when you one-day decide to sell. Keeping a record of what you have spent over the years – including the interest on the personal loan, if you decide to take that route – is a good idea to help avoid this.
Personal loan or credit card: like any financial decision, it’s always beneficial to do your homework and speak with a qualified financial advisor to help find the best option in creating your perfect home.
Liam Janke is the Senior Manager for Aussie Consumer Finance Products. He has a broad financial services experience having worked across credit card, home loan and personal loan portfolios with Aussie since 2009. Liam’s experience also extends to deposit and transaction products together with online share trading through roles at Heritage Building Society and E*TRADE Australia.