Even if you have the money available there are some times when you may want to actually pay for a home improvement with a loan rather than spend the cash you have saved up. Though taking out a loan will often increase your overall cost, there are some distinct advantages to borrowing money instead of depleting your savings. By borrowing cash you can pay it back all at once or a little at a time in case another emergency need arises. Some people purposely pay for large purchases, such a home remodeling projects, with their home improvement credit card just to benefit from the reward point bonuses. Sometimes taking out a home improvement loan can actually save you money in the long run, especially if you’re borrowing money from the same company that is supplying the materials and labor. Both The Home Depot and Lowe’s, as well as other big-box retailers, will give you a discount on their services and supplies when you finance your project through them. This guide will help you decide if you should pay for a home improvement with borrowed money or with the money you have saved up or, in many some cases, both.
First, consider the urgency of the work that needs to be done. At some point during the planning processing of your home improvement you’re going to have to decide if your project is a necessity or a luxury. It all comes down to whether or not you have time to apply for a loan and get the proper financing together. If it’s a necessity such as an appliance replacement or structural repair and you have the money available then you may want to simply pay for the improvement outright just so there’s no delay. If there is no urgent need for the work to be finished by an absolute deadline then you may want to take the time to apply for a loan and see what sort of savings you can get.
Next, consider the size of the project. Depending upon the size of your plans you may want to borrow money to pay for the project initially just so you have enough money available in case you run up against unforeseen costs. If you have any doubt about the final cost of the project, then you may want to take out a loan just to be sure you have enough money available to cover any unforeseen expenses or problems. Borrowing money gives you the added security of having enough funds available for any unplanned event, whether it be a spur-of-the-moment upgrade or an unexpected problem that needs to be addresses immediately.
Of course, the overall size of the project will also determine whether you want to borrow money for a home improvement or just spend the money you have in savings. Smaller projects with smaller expenses can often be paid for out-of-pocket without having to deal with banks or lending institutions, but if you’re adding living space onto your home or it is undergoing a major remodel you may want to take out a loan just so you have all your bases covered.
Lastly, consider the interest rates on both the loan and the savings you have. Interest rates are at historic lows right now, which means it’s relatively “cheap” to borrow money because the interest you pay on loans is much lower these days than it was just a few years ago. But that also means that any savings you have sitting in traditional bank accounts will also not be accruing much interest. If, however, you have money tied into a higher interest account then it might be more prudent to take out a loan.
Example: Let’s say you have $10,000 in a CD (certificate of deposit) that is making 5% interest. You can borrow $10,000 for a remodeled bathroom at 4% from the local bank. It makes more sense to borrow the money in this case because the amount of money you’ll pay in interest is LESS than you’re making with your investment. Many investments also have steep penalties and fees for taking out the money early or ahead of schedule as well.
Every homeowner’s financial situation is different but a home improvement loan can sometimes make paying for a large remodeling project easier to manage even if you you have the money put aside or readily available for use. The best case scenario for most projects would be to have the money available but rely on a loan either for additional savings or for added rewards. Ideally you will be able to pay that loan off with the money you have saved in order to reduce the amount of interest you pay. With a little planning and organization you can borrow money to be used for a home improvement project, reduce your overall costs and then pay off the loan quickly to take advantage of special bonus and reward points that you might be owed. On top of that you will have an upgraded living space at a fraction of the cost it would have taken to buy a new home.