How do I compare renovation loans?

Just as everyone’s home is different, there is no one size fits all when it comes to loans for home improvements. While not quite as much fun as poring over floor plans, you do need to do your homework to find the one best suited to your needs.  

So how can you decide which loan is right for you? You will first need to make a few key decisions.  Planning and considering your situation upfront will help when comparing what loan product is going to be the right match, and offer you the best value. 

1. Loan Amount: How much do you really need?
To decide how much you need to borrow, do some research and budgeting to work out how much (approximately) you are going to need for your renovation plan. It’s so easy to get carried away, but it’s smart to only borrow what you really need, even if more than that is offered to you by a lender.

Remember, when you borrow money to pay for something, the actual final ‘cost’ of that item becomes much higher when you factor in the cost of the loan. For example, if you borrow $20,000 to improve your bathroom with a 5 year Unsecured Loan and at a fixed interest rate of 12.50%, that bathroom may actually cost you around $27,417. 

2. Repayments: How much can you afford to repay?
Look at your everyday budget, or create one, to see how much you can realistically afford to put towards loan repayments. It’s always good to give yourself a buffer; failure to make a repayment at any time can cost you a lot in fees. 

Of course, it isn’t good for your credit rating either. Are you expecting any major expenses or changes in income in the next few years, changing where or how much you work, or perhaps hoping to have a baby? Be sure to build this in.

Whether you receive your income weekly, fortnightly or monthly, you need to know how much you have left over at the end of each pay period and how this will align with your repayments. This is to ensure there are no missed payment surprises. It may be worth opening a separate bank account for your repayments and transferring these funds in on payday so you are never caught out.

3. Loan Term: How long will you need to repay?
Divide the total amount of your ideal car loan amount by your planned monthly repayment to get a ballpark amount of time you’ll need to repay the loan. For example, Sarah and David wanted to borrow $24,000 to pay for a new kitchen. Based on their salary and existing expenses, he thought $120 per week / $480 per month would be an affordable repayment.  This would be $5,760 per year, meaning in 5 years they’d have paid $28,800— roughly the full amount, accounting for interest and charges.

A longer-term loan might seem attractive as it means lower monthly repayments, however the overall (lifetime) cost of the loan is significantly higher because you’ll pay more in interest and potential fees. That being said, provided you look for a loan with flexible repayments you’ll be able to take advantage of any future increases in salary that may allow you to pay down your loan faster without penalty.

4. Loan Type: Decide between a secured or unsecured loan
Given you already have a valuable asset — the property that you are improving — it can be very cost-effective to offer your property as security on your loan.  If you are confident in your ability to repay the loan, a secured loan will get you a better rate and may also unlock access to greater funds. It’s important to be aware that your asset will be at risk if you can’t make the repayments.

5. Compare: Start to request and examine your personalised offers
Now you know roughly how much you need to borrow, what you can afford as  a repayment, and how long you’ll need to repay your loan. Next, you can start to plug these values directly into lender or comparison sites to get an estimate of your personalised interest rate and repayments. 

Experiment with different combinations, such as different loan terms or repayment amounts, and match them against your needs. Need more help deciding? There are many third-party agencies (which don’t sell loans) that both rate and compare a broad range of loans.

Canstar is one of the most established financial comparison sites. They’ve been comparing products without bias since 1992. They release annual star-ratings for a range of personal loans from many providers. To do this, Canstar comprehensively and rigorously examines a broad range of loans available across Australia. To come up with an overall score, they award points for:

• Price — comparative pricing factoring in interest and fees
• Features — like the complexity of the application, the time involved before settlement, product management, customer service and loan closure

These are then aggregated and weighted to produce a total score. This means Canstar’s ratings are reputable and transparent, so you can trust the information they provide but still dig deeper if you want to.

Other comparison sites can also be useful, however, you should always check around, as some may have a ‘sales’ element — that is, they may receive money for the people that visit their website en route to a particular lender. So if the best rate isn’t being offered, it may not show up on their comparison. They also have ‘promoted’ or ‘featured’ loans, which they are paid to highlight, even if those loans do not truly reflect the best value car loans on the market. 

Another way to get information on your lender and loan is to read feedback from real, verified customers’ on ProductReview.com.au.

What questions should I ask when choosing a loan?Here’s a useful checklist to be confident you understand your loan:

• What are the interest rate and the comparison rate?
• How do these rates compare to other types of loans?
• What are the fees and charges? (e.g. upfront, ongoing, early exit)
• What are the terms and conditions?
• Do the loan term and loan amount fit your needs?
• Can you afford the repayments?
• Are you comfortable with the lender? Have you checked its reputation and accreditation?

Comparison rates are a good starting point, but you still need to decide what will work best for you. The costs involved are a major factor, but once you have shortlisted a few loans with similar costs, make time for these final checks:

• Are there flexible repayment options? Usually, you can choose between weekly, fortnightly or monthly repayments according to what suits your pay cycle. However, not all lenders offer this. It may matter to you, it may not
• Compare a loan’s conditions and fees around making extra repayments and paying the loan off before the end of the term. This can be a great way to reduce the overall cost of your car loan, but not if you’ll incur extra penalties
• Can you use the funds for the renovation you have planned? Or are your plans still coming together making that a difficult question. You can’t always use the borrowed money for whatever you like.
  
  For example, when extending a mortgage, you may only be able to spend the loan funds on improvements that meet the lender’s criteria. Other types of loans can be more flexible. Do make sure your purchase plans match the lender's policies
  
• What are the options for managing the loan over time? Check and compare how easy the loan will be to manage with regard to repayments, your personal details, any refinancing down the track. The option to manage your account online is often available, but not always, and some lenders have more functionality than others. Using direct debit for repayments is common, yet without it, monthly repayments will be much less convenient and you are more likely to be penalised for late payments if you aren’t perfectly disciplined
  

With this homework under your belt, you’re well on the way to being able to compare a range of loans out there, so you can feel confident you’re choosing the right one for you.