While personal loans are normally associated with cars, holidays and debt consolidation, Aussie has experienced an increase in the number of people using them to renovate their homes.
In June, almost one in five people (18 per cent) who settled a personal loan with Aussie were using it for that purpose, up from 12 per cent in the previous month. The numbers have been steadily growing over the past year, as many recognise the benefits of personal loans over topping up the mortgage for home improvements.
“A personal loan is a simple easy way to finance larger cost items such as a new kitchen, or other renovations which improve the value of the home,” he said.
“But most importantly, they provide a controlled means of repaying the debt so it is paid off as quickly as possible in order to minimize interest costs.”
Mr Symond said homeowners thinking about going down the personal loan path for their home improvements need to ensure they are not over-capitalising on their home.
“As long as you do your sums to ensure you are not over investing in the cost of improvements you can actually end up paying less total interest by using a personal loan because you are set to repay the debt over a shorter loan term,” he said.
“The rule of thumb is ‘time beats rate’, meaning a loan paid off faster over less time, even if it is a higher interest rate is often better than the reverse.”
For example borrowing $20K for renovations could cost (in interest paid):
- Personal Loan (at 14.49% over 5 years) $8,227.68
- Credit Card (at 16.16% minimum repayments) $22,775.17
- Home Loan (at 6.50% over 30 years) $25,508.90
Mr Symond said: “If you are going to use your home loan to fund purchases don’t assume that it is smartest way to pay. Unless you pay it off quickly you could end up paying around three times more than on a personal loan.”
“Sometimes a redraw on your home loan can be cheaper than a personal loan but only if you pay it off quickly which clearly not everyone does,” he said.
“Leaving it for the normal term is actually a very expensive form of credit because you may be paying a great deal more interest than with a personal loan.”