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Home improvement loans

Banks offer specific loans for decorating, equipping and renovating your home. Anyone can fit out their home in order to make it cosier, renovate it, buy new furniture or extend it.

 
In order to meet the expense, numerous banks have created the so-called home improvement loan or home renovation loan. In reality these are personal consumer loans. People apply for them in order to meet all kinds of expenses, from buying a computer or a car to a holiday, an investment opportunity etc. However, banks have made their loans even more specific and have created special loans for objects of consumption, studying, and, of course, for home renovation.
 
They are loans for not very large amounts which are aimed at financing specific needs with the applicants personal guarantee. The repayment period usually ranges from one month to eight years, and the amount is generally between 3000 and 42,000 euros.
 
The banks offer applicants every possible facility for equipping and altering their home. Or should they prefer, to renovate it. The application is simple and the response to their request is immediate. The monthly instalment can be fixed, variable or even progressive. For these transactions a fixed, variable or mixed interest rate is agreed, the latter combining periods of fixed and variable interest.
 
A few concepts
With personal loans for renovating the home, just as with mortgages, the term AER appears, which refers to the Annual Equivalent Rate. This is the result of a mathematical formula which includes the nominal interest rate, commission and the repayment period.
 
Furthermore, it includes the opening commission and early settlement fee. The biggest difference lies in the fact that the percentage for consumer loans such as these is higher, because they are transactions which imply a greater risk for lending banks and as such they apply higher commissions in order to protect themselves.
 
The name opening commission covers all costs emanating from the loan application. Normally, this amount is charged in one go, when the contract is signed, nevertheless, payment in instalments may also be negotiated.
 
Normally, banks offer borrowers the chance of totally or partially paying off the loan before the agreed repayment period comes to an end. But if the borrowers do this they will have to pay an early settlement fee which will be the result of applying a percentage to the amount that was repaid early.
 
However, there is a limit on variable interest loans which prevents this fee from being greater than 1%. Furthermore, some banks allow early settlement of up to 25% of the amount borrowed without any additional cost and only if more than this amount is paid back early will they charge a fee.
 
Paperwork
When taking on a home improvement loan, the client takes on certain commitments to the lending bank which can be summarised as a single obligation: to pay back the capital borrowed and the associated interest within the period established.
 
In practice, they take on additional obligations derived from the management of the loan. The financial entity must reduce the risks to a minimum. As a result the applicant is obliged to disclose their financial situation, their income, whether or not they are insured, if they own any property, guarantors or if they have other loans or debts.
 
The loans granted by banks are registered with the Bank of Spain and it is common that the prior authorisation of the loan applicant is requested before granting a new loan. If the bank is considering refinancing overdue and unpaid loans it will request more substantial guarantees and the interest and commission charged will be higher than normal.
 
If the loan applicants income is high enough and stable enough they will probably not be asked to provide a guarantor, that is, the further guarantee of a second individual who will pay in the event that the borrower does not.
 
In order to make lending a small amount of money for a short period profitable, banks apply high interest rates to their personal loans. As a result, it is advisable to carefully weigh up whether or not it makes sense to apply for a personal loan to renovate your home. There are less costly options for financing additional costs which do not require the paperwork associated to a loan application.
 
For example, there are cards which enable you to make purchases and defer the payment and withdraw cash. Although you must be careful, as the interest rate increases with non-payment. Department stores, furniture shops, hypermarkets and other establishments sometimes offer their clients the chance to defer paying for their shopping, occasionally without incurring any interest, or to start paying later.
 
Deferred payments are normally interest-free if payment is made in three instalments or less. But when the three monthly payments are exceeded, the AER of some establishments exceeds, often substantially, that of banks and savings banks.