Content supplied by Lending Works
Making home improvements is part and parcel of owning property, but they can be enormously expensive. Whether you are extending your home in order to add to its value or making some essential repairs, home improvement loans can be an effective way of financing this and are widely available in the UK. But how do you go about choosing the offer that’s best for you?
Finding the right loan involves shopping around, and there are five key factors you should bear in mind when trying to choose the most sensible deal.
1. Check the interest rates in detail
The vast majority of home improvement loans are offered on a fixed-rate basis, so monthly repayments stay the same throughout the agreed term. However, there are some variable rate options on the market, so it’s always worth checking the small print before committing to anything.
The easiest and quickest way to compare interest rates is to look at the APR, which includes all interest and fees you’ll pay over the loan term, but it’s important to remember that this figure is merely “representative”. APRs reflect what the majority of borrowers i.e. more than 51% end up paying, but that may not necessarily apply to you. If your credit rating or personal circumstances make you an elevated risk, you may well end up paying a higher APR.
2. Check your credit rating in advance
Whether you have a perfect record of repaying loans or you’ve struggled with CCJs and defaults, your credit rating will likely directly affect the interest rate you end up paying.
It’s important that you don’t make several loan applications within a short space of time, as this could affect your credit rating, so if you do wish to get a few quotes make sure the loan provider only performs a “soft search” which doesn’t affect your credit score. Before you make your first application, register with a major credit reference agency, and find out exactly what records are held on file against you. This will give you a chance to remove any out of date or erroneous information that could affect your chances of getting an affordable loan. It’s also worth checking the loan provider’s policy on credit ratings, as a less than perfect history of finance repayments might preclude you from a successful application.
3. Check the schedule of penalty charges
Most home loans are for several thousand pounds, which means the interest charges over a five year loan, for example, can be high. One way of reducing these charges is to repay your loan early – but you will be charged for the privilege by most traditional lenders. If repaying your finance early is a real option, compare the penalty charges of several providers before making a commitment. There are some alternative lenders – including peer-to-peer platforms like Lending Works, that won’t charge you a penny for making overpayments or repaying your loan early.
There will likely be several more charges associated with your home improvement loan, including deferment charges, late payment fees and arrangement fees. Once again, you should ask for a full list of these charges from every loan provider you compare.
Payment Protection Insurance has received a lot of bad press recently. However, the principle of protecting your payments in the event of long-term illness or redundancy may still suit your personal situation – depending on the terms of your employment. If your salary payments aren’t covered in these circumstances, some form of insurance may be beneficial. However, you should compare the insurance being offered by home loan providers, and it may also be prudent to look for your own third-party coverage.
5. Unsecured or secured
If you need several thousand pounds for a major extension to your home, the average, unsecured home loan may not be sufficient. Depending on how much you need, you may have no option other than to secure a loan against your property. However, this means you will need to repay your loan from the proceeds should you decide to subsequently sell your house. And if you fall behind on repayments, your home could be at risk.
One significant advantage associated with a secured loan is the ability to stretch your repayments over the course of up to 30 years, although the interest will be higher over a longer term. An unsecured loan will usually be repayable within five years, so the monthly repayments will be much higher while overall interest charges will be lower.
Improving your home is usually an investment for the future. By shopping around and choosing the option that best suits your financial circumstances, you can get real value for money whilst increasing the value of your property.
About the Author
Nick Harding is Founder and Chief Executive Officer at Lending Works. Lending works is a peer-to-peer lender that matches thoroughly underwritten personal loan borrowers to shrewd lenders so both receive a much better deal. Lending Works is the first peer-to-peer lending company to have insurance that protects lenders against borrower defaults and fraud. For more information, please visit – www.lendingworks.co.uk or follow Nick Harding on Google+