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A Guide to Financing for Home Improvement

Where to find personal loans for home improvement

The most common providers for personal loans are:

  1. Local bank – This is the most common place to get a loan. But recently, lending regulations have tightened and it has become increasingly harder to qualify for loans.
  2. Credit union – Much like your local bank, credit unions offer traditional lending options. However, you typically need to be a member in order to qualify for a loan. Because credit unions are not-for-profit, you will most likely find that they offer the lowest rates.
  3. Peer to peer lending – This is a new method of online lending. While very nontraditional, peer to peer lending connects borrowers with their funds from investors. Investors put money into the company with the prospect of earning higher rates of return on their investment than a traditional savings accounts, and borrowers are able to apply for a loan, just as they would through any other type of lender.

Other financing options

While these options might not be the first place to start for a home renovation, they can be used for larger home improvement projects.

  1. Home equity loan (2nd mortgage) – Differs from a HELOC because it is for a fixed term, a fixed amount, and fixed payment.
  2. Cash out refinance – You can refinance your first mortgage and get a bit of cash out as a part of the refinance. Of course, there are closing costs involved, so when using this method of financing, make sure that you are getting other benefits of refinancing, such as a lower term or consolidating other debts.
  3. 401k loan – You may not realize that you have access to your 401k before retirement—without cashing it out and paying the tax penalty. But you do. You can take out a loan against your 401k, which you payback just like any other loan. The good news here: you’re paying the interest back to yourself instead of a bank.

How to get low rates

There are several factors that go into your interest rate, such as:

  1. the loan amount,
  2. term,
  3. type of loan,
  4. your income,
  5. ability to repay the loan,
  6. and most importantly, credit score.

Your personal credit score is probably the biggest factor in determining your rate because the higher your credit score, the lower your interest rate will be. Check your credit score for free here, or have only one lender pull credit. You should shop around for rates and products to find the best program, but don’t allow everyone that you speak with to pull your score, to avoid a ding on your score.

This article was originally published on Super Money.

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Michelle Hermo