When it comes to choosing the best loan for your renovation, there’s no one-size-fits-all. Your loan conditions should be tailored to suit your budget, income and renovation goals.
However, for many people, an unsecured renovation loan is the best option.
Why are they popular?
An unsecured renovation loan doesn’t require an asset (like a car, or house) to protect the lender. This means you can quickly and easily access the funds that you need without putting your assets on the line.
Instead of securing the loan with collateral, the lender looks at your credit history and your ability to make repayments. The loan is paid back over an agreed period of time, with a personal loan interest rate. It’s that simple! So if you have a good credit score, an unsecured loan could work well for you.
Who provides unsecured renovation loans?
Banks, credit unions and online loan companies offer unsecured loans. Each lender sets their own eligibility requirements and interest rates. Online lenders are often the fastest, most convenient option, as the entire process is handled online. And unlike home loan top ups you don’t need to provide plans for your renovation as part of the approval process. So you can get started on making your plans a reality, instead of waiting for your home loan provider to decide if your plans suit their policies.
Do you need some help applying for your loan? Choose a loan provider with a solid against reputation for good customer service. Check customer service ratings and reviews to find one that’s right for you.
How much can you borrow?
While some Australian lenders of unsecured renovation loans will provide as much as $70,000 to be paid back over seven years, most will allow you to borrow between $5000 and $50,000, paid back across six months to five years.
Interest may be fixed or variable and many lenders will allow you to make early repayments, which reduces the interest costs.
At Plenti, we believe in tailoring unsecured renovation loans to suit your unique financial situation and lifestyle. This means rewarding your strong credit history with attractive rates that are personalised to you and offering the flexibility to pay it back faster. In fact, we’ll never charge you fees or penalties for paying your loan back early.
It’s your life – you’re in control.
You have a dream. Now what?
It’s time to transform your unique dreams, goals and priorities into reality. An unsecured renovation loan buys you the freedom to use the funds for almost anything! We’re talking about improving your kitchen, updating your bathroom, extending into the loft or just finishing off the landscaping you’ve been putting off for a while now.
According to a recent survey by Houzz about renovations in Australia, the popular projects included
- Kitchens are the most popular choice (26% of respondents)
- Living Room upgrades accounted for 23% of renovations, with the trend to open plan living and indoor/outdoor spaces maintaining popularity
- Bedroom renovations were surprisingly the third most popular project, potentially including adding additional bedrooms moving up into the roofspace
- Bathroom renovations are always important, with 17% of renovation plans including upgrades or additional bathrooms for home life harmony
Your lender will want to know the purpose of the loan when you apply. They’ll take this into account when tailoring the loan size and conditions.
Is anything off limits?
If you’re using your renovation to improve your home or investment property in any way, it is likely an acceptable use of the loan funds. Think twice before taking out a loan on behalf of a partner, friend or relative. If they fall on hard times and can’t make repayments, or your relationship breaks down, you will be responsible for paying back the loan.
How much interest will you pay?
There are two key factors to consider - the interest rate, and the length of the loan. The latter can be really important when deciding how to fund your renovation. If you’re looking at extending your mortgage to fund your renovation, take into account the amount of time you’ll be paying it off. While a low-interest rate and minimal change to repayments can look cost-effective at first, when you calculate the overall cost of the loan over the years you may be surprised how much it all adds up.
Of course, when comparing loans of similar length, a small difference in the loan interest rates can impact your loan over time. For example, an interest rate of 6% on a $10,000 loan over 5 years will cost you around $1,600, compared to around $1,880 for a 7% interest rate. You may be able to negotiate a lower renovation loan rate if you have a high credit score, so look for lenders who include that in their offer.
Have a think about whether you prefer a variable interest rate, rather than a fixed rate. A variable rate could fluctuate throughout the life of the loan, which means your repayments may increase or decrease from time to time. On the other hand, a fixed interest rate provides a sense of certainty. You’ll know exactly how much will come out of your bank account each month and you’re protected from the possibility of future interest rate rises.
A loan with a variable interest rate usually has no early exit fee. This means you won’t be penalised if you pay back the loan early. Consider the full picture when deciding which option works best for you. How quickly do you plan to pay off the loan? Is there a chance your repayment capacity will improve over time, allowing you to pay your loan off early? How much certainty do you need to meet your budget?
What about hidden costs?
Remember, a low interest rate is only one part of the story. Application costs, early repayment fees and account keeping fees are just some of the extra charges that could apply. Keep these in mind when choosing a provider.
Do you hope to pay your loan off sooner? Look for lenders who don’t charge early repayment fees so you’re not penalised for your efforts.
Getting the best deal on a renovation loan can save you thousands in interest and fees. It’s well worth doing your homework!
Will you be approved?
Expect each lender to check your credit history, current debt and income so they feel confident you can repay the loan. This is particularly important for an unsecured loan as the lender can’t claim your assets if you fail to make repayments.
It’s a good idea to shop around and compare the offers you receive from different lenders to make sure you’re securing the best personal loan rate.
What if you’re self-employed?
If you’re self-employed, funding a renovation with a loan (secured or unsecured) can be challenging. Some lenders may be reluctant to offer you a loan because of concerns about your financial stability.
But hang in there. While people who are employed full-time find it easier to obtain personal loans, those who are self-employed can still qualify. You might just have to jump through a few more hoops.
Lenders will often ask for additional documentation from self-employed people, including:
- The last two years of your personal and/or business tax returns
- Financial statements showing the profit/losses accrued by your business
- Recent bank statements
- Documents showing outstanding loans or credit card debts
- Proof of rental income from any rental properties may you have
- An Australian driver’s license, passport or a proof of age card
- A Notice of Assessment given to you by the ATO (Australian Taxation Office) for the past two years
- Your business’ ABN, address and licenses
If you don’t qualify for a renovation loan, there are other options. For example, a low doc loan is a personal loan that requires less documentation, but interest rates are usually higher than standard loans.
As a self-employed borrower, it’s wise to seek out a lender that offers flexible repayment periods with both fixed and variable interest rates to give you more options.
Know where you stand.
Knowledge is power! Find out your credit score before you apply for an unsecured loan. You can do this online for free through government financial guidance site Moneysmart, or financial comparison sites like Canstar.
Your credit score takes into account information like the number of credit applications you’ve made and the amount of money you’ve borrowed. It also notes your history of repaying debts on time.
A typical credit score will fall between zero and either 1000 or 1200, depending on the credit reporting agency. The higher the score, the better!
Checking your credit score is a worthwhile exercise. It can help you negotiate better deals or understand why a lender rejected you. If you spot any errors in your credit report, you can fix them for free by contacting the credit reporting agency.
Give it a polish!
There are ways to clean up your credit report and increase your credit score to improve your chances of being approved for a renovation loan:
- Pay your rent, mortgage and utility bills on time
- Make credit card repayments on time and try to pay more than the minimum repayment
- Lower your credit card limit
- Limit how many applications you make for credit
All of these things will help your credit score to improve over time.
You’re in good company.
The vast majority of personl loans are unsecured. With a quicker approval process and greater freedom in how you spend the funds, it’s easy to see why this is an attractive, hassle-free option for lower loan amounts.
What’s the catch?
With your personal assets safely out of the firing line, the lender can’t claim your possessions or the contents of your bank account if you default on the loan. But remember, if you can’t make repayments, your credit rating will be affected. If your lender passes your account onto a collections agency or takes legal action against you, this information is also recorded on your credit report. A low credit score makes it harder for you to obtain loans or credit in the future.
Secured vs Unsecured
If you own an asset, like the home or property you are renovating, you may be able to obtain a lower interest rate with a secured loan. When applying for a secured loan, you agree that if you can’t make repayments, the lender gets to take your asset and on-sell it to pay for the loan.
Lenders offer a lower interest rate for secured loans because they view them as less risky. Providing an asset to guarantee your loan may also mean you can borrow a larger amount or pay it back over a longer period than you could with an unsecured loan.
Keep in mind, the approval process is often longer for a secured loan, with more documents required, and there are more restrictions around how you can use the funds.
When deciding between a secured and unsecured renovation loan, consider the pros and cons. While a secured loan may offer lower interest rates, are you willing to risk the asset that you provide as collateral?
You’ll never have to worry about losing your assets if you default on an unsecured loan, but it’s likely to come with higher interest rates and your credit rating will take a hit if you can’t make repayments.
Whether secured or unsecured, a renovation loan should be customised to your unique circumstances so that you can move forward with confidence in your own grand design.