Home improvement or extension loans are special purpose loans exclusively meant for renovating or adding more space to a house.
Our house reflects our personality and hence, we spend considerable amount of time and money for decorating and maintaining it. With passage of time, we may have to carry out extensive repairs for upgrading or remodeling it in order to match our present-day requirement such as creating extra space for our growing children or ageing parents. Although, paying cash is the easiest way for financing small renovations, extensive repairs or big ticket expense such as adding a new floor may require you to borrow money from external sources like banks and NBFCs.
Here is a brief analysis of the features of various loan options to help you select the best option for you.
Home improvement loan
Home improvement or extension loans are special purpose loans exclusively meant for renovating or adding more space to a house. These loans can be availed by both existing and new customers andare approved after technical appraisal of the property. The disbursement is made either in lump sum or in installments based on the progress of renovation/extension work.
These loans require you to contribute at least 10 per cent of the project cost and their interest rates and loan tenures are also similar to home loans. For example, HDFC Bank charges the same interest rate (9.45 per cent) on its home loans, home improvement loans and home extension loans.
However, these loans have shorter deadline for project completion, ranging from 6 months to 1 year.
Top-up loan on home loan
Top-up loans are all-purpose loans given to existing home loan borrowers to meet their emergency funding requirements. These can only be availed by existing home loan borrowers after completing certain period from the sanction or last disbursal of the original home loan.For example, SBI provides this loan to its existing home loan borrowers having a satisfactory track record of repayments of at least 1 year.
The rate of interest in case of top-up loans is usually lower than personal loans but comparatively higher than home improvement loan. Generally, the interest rates on home improvement loans start from 9.50 per cent p.a. and can go beyond 12 per cent p.a. However, the documentation associated with top-up loans is lot lesser than the home improvement loans or personal loans.
Gold loans are secured loans wherein your gold jewelry is used as collateral for the loan amount. Moreover, being fully secured loans, your credit history has no role to play in the approval of your loan application and disbursal does not take more than 2 days. However, the interest rate can go up to as high as 17%.
Loan against property
Loan against property is also a secured loan, wherein the lenders keep your property as collateral for financing your needs. The loan amount can go up to 70 per cent of your property’s market value while the interest rates mostly range between 11 per cent and 16 per cent. The loan tenure and processing time are similar to that of home loans.
Personal loan is the easiest credit option available for financing home extension/renovation. However, the interest rates of personal loans can range anywhere between 15 per cent and 25 per cent p.a. and prepayment charges can be as high as 5 per cent of the outstanding balance. The maximum tenure offered is generally 5 years, which may result in higher EMIs in case of high value personal loans.
Factors to consider while evaluating loan options:
Your loan amount, loan tenure, interest rate, documentation, loan processing time and credit score are some of the major factors that you need to consider while evaluating those credit options. Consider home improvement/extension loan or top-up loan if you are looking at higher loan amount with higher loan tenure. Gold loan or loan against property will be the most viable option for you if you have lower credit score, given that they are secured loans and are granted on the basis of your collaterals. Settle for personal loans if you are looking at lower loan amount (less than Rs.10lacs), with lower tenure.
Ultimately, your choice of credit option should be based on how the individual features and benefits of credit options suit your requirements.
The author is vice-president, Paisabazaar.com