Should You Opt for a Personal Loan for Home Renovation?

A home is an emotional investment and not just a roof for most of us. It is a reflection of our personality, and hence, it needs to be renovated after a few years. However, the cost of home renovation can be unaffordable for many people. Even a small alteration or improvement can cost a pretty penny. But with the easy availability of loans, nowadays, you do not have to wait to renovate your home until you save a sufficient amount for it. As a personal loan is one of the popular loan options for a quick and easy loan process, many people consider it the only option when renovating a house. Let's see what are the benefits and drawbacks of taking a Personal Loan for home renovation:

What is a Personal Loan?

A personal loan is an unsecured loan that does not require any collateral and can be availed with minimum documentation. It is an easy way to get funds to take care of various personal and financial needs and can be repaid according to the terms and conditions. Since it does not require any security, the banks and Non-Banking Financial Companies (NBFCs) only check your credit score, credit history, and income while approving/rejecting your personal loan application. However, the rate of interest on a personal loan depends upon your repayment capacity and is very high compared to the other secured loans. It typically starts at 12% p.a. and can go up to as much as 28% p.a.

Here are the key benefits of opting for a personal loan for home renovation:

1. No Restriction on the End-Use:

Many loans come with a specific purpose for which the loan amount can be utilised. For example, if you take a car loan, you can utilise the loan amount only to buy a car and not for a vacation. However, there are no such restrictions on the usage of a personal loan. A borrower is free to utilise the personal loan amount for almost anything, as far as it is legitimate. So, you can use this amount for your child's education or wedding, home renovation, buying an expensive item, investing it further to earn returns, etc.

2. Quick and Easy Loan Process:

A Personal Loan is an unsecured loan, it can provide you with funds in a quick and easy way. It can be availed in 10 minutes to 7 days, depending upon the lender and your credit profile. However, other types of loans require a property valuation and evaluation of a financial instrument, which can take time and can delay the loan process.

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3. No Collateral Required:

As personal loans do not require any security to back up the loan, there is no risk of losing the asset or collateral if you are unable to repay the loan. For example, if you avail of a Home Renovation Loan or Loan Against Securities, such as shares, mutual funds, life insurance policy, etc., then the lender holds the right and has the authority to sell your property/security to recover the due amount.

4. Minimum Documentation:

To apply for a personal loan, you do not need to submit a lot of documents. Most lenders ask for your identity proof, such as PAN Card, AADHAR Card, etc. address proof, such as Driving Licence, AADHAR Card, etc., and income documents, such as latest payslips, ITRs, P & L Statements, etc.

5. Convenient Loan Tenure:

You can choose the loan repayment tenure from 12 months to 60 months as per your convenience and repayment capacity. If the loan amount is high, many lenders can extend the loan tenure up to 7 years.

Here are some of the drawbacks of opting for a personal loan for home renovation:

1. High-interest Rate:

The rate of interest is the major deciding factor because personal loans have the highest rate of interest, and it generally ranges from 12% p.a. to 28% p.a. When your repayment tenure is a longer duration of 4-5 years, you end up paying a lot more than the principal amount.

2. Other Charges And Fees:

Apart from the interest rate, there are several other charges and fees that you need to pay to your lender. The banks or financial institutions charge a certain amount to process your loan application. This processing fee can range from 1% to 3% of the loan amount. Besides, most banks and financial institutions charge pre-payment fees if you want to foreclose your personal loan. The charges vary from company to company and generally range between 2% to 5%, which makes a big difference, especially when the dues are high.

What are the alternative options to a Personal Loan for home renovation?

To avoid paying the high-interest rate and other fees and charges on a personal loan, you should consider a Home Renovation Loan, also known as Home Improvement Loan, instead. These are secured loans that are offered against collateral in the form of a self-occupied property. The loan amount can be utilised for any range of renovation and improvement activities like painting, flooring, extension, furniture, repairs, etc. A Top-up Home Loan or Home Renovation Loan enables you to renovate a home and make improvements as per your requirements at an affordable interest rate, which can be the same or slightly higher than the home loan interest rate.

However, some financial institutions offer Home Renovation Loans without any collateral. So, they basically offer a personal loan with a specific name for which the loan amount is utilised. You should note that the interest rate for an unsecured Home Renovation Loan is typically higher than the secured Home Renovation Loan.

Here are the benefits of opting for a Top-up Home Loan or Home Renovation Loan for home renovation:

1. Lower Interest Rate:

The rate of interest on Top-up Home Loan and Home Renovation Loan ranges between 7% p.a. to 12% p.a., which is comparatively lower than the rate of interest on Personal Loans, which can be anywhere from 12% p.a. to 28% p.a. The interest rates of Personal Loans depend upon the lender, your repayment capacity, credit history, and credit score. Whereas the interest rates of Top-up Home Loan and Home Renovation Loan depend upon the lender, the value of a property, loan amount, and your repayment ability. Many lenders offer Top-up Home Loan at the same interest rate as Home Loan.

2. Quick Processing:

There is a minimum documentation requirement for these loans, especially Top-up Home Loans. Hence, the loan processing is faster so that you can get started with the home renovation as early as possible.

3. Soft Credit Check:

As already discussed, your credit score and credit history play a significant role in your personal loan approval because the loan is offered without any security. Whereas, in the case of a Top-up Home Loan or Home Renovation Loan, most lenders do not check the credit score because the loan is backed up by the property. This makes these loans the best choices for those who do not have a credit history or good credit score. However, depending on their policies, some lenders may require an average credit score to approve the loan.

4. Tax Benefit:

A Home Renovation Loan can provide you with a tax benefit on the interest component. You can avail of a tax deduction of up to Rs 30,000 per annum on the interest that you pay on this loan under Section 24 of the Income Tax Act, 1961. You should know that the deduction of Rs 30,000 is within the overall limit of Rs 2,00,000 available on loan interest payments of self-occupied homes. This will help in lowering the overall cost of your loan.

5. Longer Loan Tenure:

Unlike a personal loan, Home Renovation Loan or Top-up Home Loan comes with a longer loan tenure of up to 15 years. So, you can choose the tenure as per your repayment capacity and lower your monthly EMI burden.

To Conclude:

Our home is a reflection of our personality and the first impression of our guests. Therefore, it is necessary to renovate our home as and when required. However, making these expenses might not be affordable to everyone. Home Renovation Loan and Top-up Home Loan can help you meet these expenses at a comparatively lower interest rate than a personal loan. Due to the high-interest rate of Personal Loans, they are advisable to opt only for emergencies when you have no other option left. It does not make sense to spend more on the interest outgo when you can borrow the same amount of money with several other benefits. However, before choosing the lender for a Home Renovation Loan, it is advisable to do proper research and compare different lenders on all the parameters like interest rate, customer reviews, loan approval process, customer service, etc. Furthermore, read the loan agreement carefully to avoid any inconvenience in the future.

Warm Regards,
Ketki Jadhav
Content Writer