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Secured vs. Unsecured Home Improvement Loan

Jun 27, 2008
When you start researching home improvement financing you'll quickly learn that there are different ways to borrow money for home improvements. The two general types of loans are often categorized as "secured" and "unsecured" loans.

Unsecured loans are loans which are given to you based on your credit rating and not based on anything you have to offer up for collateral. Your credit rating is really nothing more than a measure of your historical ability to pay off debts and money given to you in the past. If you've always paid your bills on time and always pay back debt then you probably have a pretty good credit rating. By financing your home improvement projects with an unsecured loan of some type you will be paying the loan off without any sort of collateral offered to the bank. A credit card, even a credit card from a home improvement hardware store, is usually considered an unsecured loan.

Secure loans are loans in which the bank or lending institution have some sort of collateral or item which they technically "own" until you pay it off. When you finance car payments or buy a house with a mortgage the bank technically owns your car or home until you've paid off the debt amount plus interest. Your house is the collateral. If you default on your loan then the bank can take your house or car and sell it in an effort to regain some of the money they lent you.

Unsecured loans are good for small home improvement loans which you can pay off quickly. Home improvement store credit cards are good to use for small home improvement projects that are under $1,000 because the application process is usually fairly easy. Sometimes those home improvement store credit cards even offer zero percent interest or discounts on merchandise for a fixed period of time.

When you're exploring larger home improvement financing options you're almost always going to end up with some sort of secured loan because most of the time the equity or "extra value" in your house is used as collateral for a loan to improve it.

Secured home improvement loans such as home equity loans and home equity lines of credit generally have a lower interest rate, which makes paying them off easier over the long run. There is often more paperwork and a longer delay associated with secured loans because they are so much larger than most secured loans. Depending on your tax situation you may even be able to deduct the interest you pay on the secured home improvement loan from your yearly income tax returns.

No matter what type of home improvement financing you consider remember that you do have to pay the money back and you will be paying interest on the money owed. Plan ahead and make sure you can really afford the monthly payments before you go forward with your home improvement project. Many home improvement plans are scaled back when people finally begin to consider the true cost of home improvement financing.

If your home improvement project is a rather large one such as remodeling a kitchen, adding a bathroom or building an addition on your house then a secured loan that offers up your home's equity as collateral is the best form of home improvement financing.
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