Festive Home Renovation: Is A Personal Loan Or A Home Renovation Loan Worth It?

Our parents have always taught us that Goddess Lakshmi is associated with cleanliness, purity, and orderliness, and that cleaning is a sign of devotion to her.  

With the onset of festivals, everyone dreams of a clean and improved house. So sometimes, there is a need for renovation as well. However, this could be big or small depending on the requirement.  

In some scenarios, one could consider taking a personal loan to undertake the renovation work. However, one should account for the cost involved, too, as financing it through a personal loan is not always a smart move.  

So, here are a few things you should consider before you decide on your funding sources for a home renovation. 

Are You Financially Comfortable?  

Before even considering the sources for renovation, you should take a good look at your finances.  

You know your income, savings, and current expenses. Consider if you have the budget, maybe a part of it? Also ask yourself if you can wait for some time and see if you can accumulate for this head? 

Says Madhupam Krishna, a Securities and Exchange Board of India (Sebi) registered investment advisor (RIA) and chief planner, WealthWisher Financial Planner and Advisors: “A personal loan can be a great way to fund renovations without tossing your budget into disarray, but you need to be confident that you can manage the monthly payments or the equated monthly instalments (EMIs). This is especially critical during the festive season, which typically brings additional expenses of shopping and travel.” 

Is It A Value Addition Or An Ego Booster? 

Consider whether the renovations you have in mind will enhance your home’s value.  

Upgrades such as remodelling kitchens or bathrooms, or improving the overall design can significantly boost your personal space and the worth of your property. But the cost can be justified if you plan on living in your home for several years ahead. Doing it just because someone you know has done it could be a waste of money and time. 

Will You Enjoy The Upgrade? 

The festive season is about decorations, friends and family visits, and creating cherished memories. A well-renovated home can serve as a beautiful backdrop for celebrations with loved ones.  

Says Krishna: “Check if this makes you happy. If yes, then happiness from welcoming the festive joy can outweigh financial concerns, making it a worthwhile investment.” 

Small Renovation 

Sometimes, the requirement may be small, but beyond your savings. However, bearing the expenses on your credit card or liquidating other investments may not be a wise decision.  

A personal loan could come in handy here. Likewise, for a major renovation, a home improvement loan will be better than a personal loan as it comes with a lower rate of interest. So, the renovation requirement will decide your credit options to finance it. 

Tenure 

If you are planning to take a personal loan and clear it in less time, then it would be a good option to consider. Paying the loan in a shorter period means low interest payment, which can help in bringing the cost of finance down. Also, paying back on time or before time will enhance your credit score. 

Do You Have A Less Costly Financing Option? 

The best scenario would be to plan it before and make provisions by adding a monthly amount for these expenses.  

But if you haven’t undertaken any such exercise, seek if you have other resources. Are you expecting some investments to mature shortly? Can you book some profits in a tax-efficient way from your portfolio? Does someone owe money to you, and you can ask him to pay it back? Are you expecting any windfall income?  

A personal loan always comes with interest and processing fees. You can save on this if you can take an alternative route. 

When A Personal Loan Is Inevitable 

Says Krishna: “Personal loans come with hefty rates of interest. It’s worth your time to compare various lenders and their offerings. Prefer your bank where your salary gets credited or your other loans (Home or Vehicle) are running or paid back.” 

A lot of banks, run special promotions, especially during the festive season. They may offer loans at lower rates of interest or with a reduction in processing fees. Look for loans with terms that will cost you less in the long run and not put extra pressure on your finances. 

Deciding whether to renovate your home with a personal loan this festive season can be a wise choice, as long as you approach it with careful planning. All EMIs (existing and new loans) combined should not exceed 40 per cent of your income in hand. 

Home Renovation Loan Is Also An Option 

According to experts, you could also opt for a home renovation loan. Before applying for a home renovation loan, it is important to thoroughly evaluate your home renovation needs and budget to ensure you only borrow the amount you can comfortably repay. Also, make sure to carefully review the terms and conditions of the proposed loan agreement before signing up for it.  

Says Rahul Kalyani, senior vice president – partnerships, LoanTap, an online personal loan platform: “A home renovation loan may come with a lower rate of interest and also may provide some tax benefits. However, it may require one to pledge the home as a security. In most cases when one needs a small amount for home renovation purposes, giving away the home as security may not sound like a desirable option. For instance, one may not want to pledge their home worth Rs 1 crore for a Rs 5-10 lakh loan amount. In that case, one may take advantage of the unique benefits that personal loans for home renovation offer.”  

Advantages And Disadvantages Of Home Renovation Loan 

A home renovation loan typically offers a lower rate of interest rate as compared to other types of loans. Such loans come with a rate of interest under 10 per cent, with some as low as 6.5 per cent, making them more attractive than other loan options.  

“When you apply for a top-up loan, the bank already has most of the required documents as you would have submitted them to avail of a home loan. This makes the documentation process simpler and faster compared to applying for a personal loan,” says Atul Monga, CEO and co-founder, BASIC Home Loan.  

You may also be eligible for tax benefits under Section 24(B) of the Income-tax Act, 1961. However, these benefits are subject to special conditions. Hence, it is important to review tax guidelines carefully to ensure you meet the requirements.  

“However, there are some drawbacks to taking out a home renovation loan, such as the risk of over capitalisation – spending more on improvements than the value they add to the property. If the expenses aren’t carefully planned, you might end up investing far more in renovation which may not significantly increase the value of your property,” adds Monga.  

Also, a home renovation loan takes longer to process as compared to a personal loan. This is because the lender needs to assess various factors, including the current value of your property, your credit history, and repayment capacity, before approving the loan.