Are you planning a renovation? Renovation projects are a great way to add value to your home. They also offer the opportunity to make changes to improve your enjoyment of your house. The only challenge is that it’s not always possible to save the funds needed to pay for a renovation before you begin.
Don’t use the credit card
One of the greatest temptations when planning a renovation is to start putting costs onto your credit card. The great thing about credit cards is that they usually offer you lots of available funds. It can be easy to start using them for renovation costs as your planning progresses.
The problem with credit cards is that they can have very high interest rates. If you don’t pay them off in full every month, you can quickly start seeing your borrowing increase as the interest mounts up.
Paying for your renovation on a credit card also requires you to be disciplined with your own repayment plan. You will need to both limit your total spend to your budget and be prepared to make payments regularly to avoid a short-term finance option becoming a long-term problem.
Choose a personal loan
Personal loans can provide a great option for funding a renovation. You can both access the funds that you need and set a plan in place to pay the debt back over the longer term. And, as a rule, the interest rates tend to be lower than credit cards.
Here are three tips for using your personal loan for renovation.
1. Budget your spend
Setting budgets is an important part of applying for any loan. Renovation can be a tricky beast, and you may find it challenging to pin your costs down. A good technique is to create a budget for your total project upfront and include an estimated overspend.
If you build an overspend into your budget, you can also make sure that you set up the flexibility to make a lump sum payment onto your personal loan when your project is complete. That will allow you to pay off any money that you didn’t use for your renovation upfront.
This does require discipline on your part as it’s important to avoid the temptation to spend the money just because it’s available. Remember if you use it now you’ll have to pay off more in the longer term.
2. Budget for your repayments
Once you understand how much money you need to borrow you can start planning how quickly you can pay it off. Your budget will need to include all your income and your costs. This will let you understand how much money you have available for regular repayments.
Consider repayment frequency
If you get paid fortnightly or weekly, you might consider aligning your repayments with your pay. Taking a monthly payment and splitting it in two could make managing your payments easier, and it will also save you money in the long term.
Turning one monthly payment into two fortnightly ones gives you one additional month of repayments in a 12-month period, allowing you to shave 5 months off the life of a 5-year loan. That’s also going to reduce the interest you pay over the life of the loan.
Try out our Personal Loans repayment calculator to estimate what your repayments might be.
3. Build in the flexibility that you need
Most people are cautious when they build their repayment budgets. It’s sensible to make sure you can meet your commitments - failing to make payments can affect your credit record and your future ability to borrow money.
If you start paying off your personal loan and discover you have more funds available, you may find yourself ready to increase your repayments. Not every personal loan is flexible to changing circumstances. Take time to include the flexibility you need into your loan structure up front so you pay it off at a speed that suits you.
There are two main changes you may consider making to your repayments. If you discover you have more funds available from your ongoing budget, you may increase your regular repayments.
Alternatively, if you have a second source of income, an annual bonus, or you receive a windfall, you may choose to make a lump sum payment. If you build these into your loan you can choose whether to make them or not depending on your financial position. The key is that if you do pay more, you won’t be penalised for it.
Using a personal loan for your renovation is great way to get your project underway. By budgeting carefully upfront you can be sure you have the funding you need to enjoy the changes you make. Remember to consider building your loan so it is flexible to your long-term repayment needs.
Disclaimer: Please note that the content provided in this article is intended as an overview and as general information only. While care is taken to ensure the content is correct, the information provided is subject to continuous change. Please use your discretion and seek independent guidance before making any decisions based on the information provided in this article.