Personal Loan vs Renovation Loan : How to Fund Your Home Renovation

Personal Loan vs Renovation Loan : How to Fund Your Home Renovation

Before purchasing a new home, most homeowners are concerned about choosing the best housing loans, making matches, and maybe taking several visits to different banks. Once they finished with their HDB loan comes another concern – renovations, and the prospect of securing a loan for improvements.

The trouble with renovating a Singapore flat is you never know how much it’s going to cost. Sure, a contractor could tell you it’s going to cost $20,000, and a quote is just what it is: the estimate. By the time all the renovations are completed, you might be spending twice that amount with all the add-ons or mind changes.

Fortunately, banks in Singapore provide these loans, so homeowners can rest easy knowing they can finance their renovation costs (and take up to five years tenure). What does this loan require, and what considerations will lenders take care of while considering one?

Things To Consider When Getting A Renovation Loan

Renovations are not cheap, so unless you’ve got much cash on hand, you’ll most likely have to turn to a home renovation loan to fund the improvement. As a consequence, one of the most important things you will note is that before you are even able to consider looking into this loan, mainly one would need to look at a list of conditions;

  1. Tenure of the Loan​

In Singapore, banks will let you pay back the loan for a period of 5 years. Personal loans on the flip side come with a repayment term of up to 7- years. Therefore, if you plan to repay your mortgage for a more extended period, a personal loan will be a better alternative for you.

  1. Amount of the Loan

Your next question to ask is, “What amount will I borrow, respectively, for a home renovation loan?”.

On average a 4-room flat renovation costs about S$40,000 to S$60,000, based on furnishing choices. Therefore, you would usually need to take out an amount of S$40,000 to S$50,000 for your upgrade if you don’t have the cash at hand. This may be the case if you’ve just paid a significant cash amount for the new home.

Renovation loans in Singapore have a limit of S$30,000. For instance, a local bank in Singapore allows you to take a minimum loan amount of S$10,000. In contrast, some local banks have S$5,000; the idea is to ensure you do your research when applying for any home renovation loans.

  1. Interest Rate

The cost of borrowing is undoubtedly one of the primary considerations if the rate is high then just as taking out an HDB loan. Some banks offer their loans based on a percentage of the monthly balance, and some use a flat rate.

The main difference between the two is that interest is paid on the outstanding amount on a monthly rest package. That means you are paying less interest over time when you pay off the loan. A flat rate bundle is where the interest based on the entire principal is measured at the outset.

Since interest rates on renovation loans are usually lower than personal loans, to apply for one, you must meet specific eligibility requirements of personal loans. This involves being an owner of the property to be restored, becoming a Singapore resident or PR, having a decent credit score, and meeting the minimum criteria for income.

From our perception, we may see flat rates are usually lower. However, borrowers will need to take into consideration the effective interest rate.

Girl choosing wall color

Personal Loan vs Renovation Loan - What’s the difference

What sort of loan do you need to renovate your dream home?

Fortunately, there are two forms of loans that you can get to fund your renovation project: personal loans and loans for renovation provided in Singapore by license money lenders or banks. 

The table below will assist you to have a better understanding of what is the difference between the two;

Types of Loans
Renovation Loan
Personal Loan
Application of Loans?
Applicable only to homeowners or family members. A joint application is permissible. All income requirement needs to be metFor anyone who meets. The income requirement can apply
Are all banks offering such loans?
For banks which offer renovation loan – DBS,POSB and OCBC, while other banking facilities like UOB, HSBC and Citibank do notAll banks
How is the interest charge?
Interest are charge on a monthly basis. This means that, interest is charge base on the outstanding amount of your loan, therefore as you pay off your loan amount every month, the interest reduces over time.Flat rate basis. Interest is charge base on the original loan amount.
Is there a maximum loan amount?
A maximum of S$30,000, or 6 times your monthly income, whichever is lower.

For joint applications, the cap is S$30,000, or 12 times the monthly salary of the lower-income earner
For those who earn S$20,000 > S$30,000 or less a year, borrowing is 2 times your monthly salary

For those who earn S$30,000 > S$120,000 or less a year, borrowing is 4 times your monthly salary
Is there a minimum requirement for the application?
An income of a least S$24,000 a year is needed. For joint applications, the main applicant must earn S$24,000 a year while the joint partner has to earn S$12,000 a yearDepending on bank requirements. A minimum requirement is S$20,000
Loan Tenure
Between 1 year to 5 yearsBetween 1 year to 5 years

What Makes Renovation Loan Better?

When we take a look, we may notice that personal loans and renovation loans may appear deceptively similar. A fundamental similarity is that both offer loan tenures ranging from 12-60 months, and have up to 6X your monthly salary or $30,000 in loan amounts. In reality, you could see banks promoting their loans as “low-interest rates and monthly payments” to finance renovation work.

The key here is not to be fooled into the illusion that personal loans are better.  Having glanced at all interest rates, it’s clear which one is the better deal. Here’s why you should consider taking out a personal improvement loan:

  • Personal Loans have a higher processing fee – One has to understand that a processing fee of around 1.5% to 4% is charged and that amounts to roughly around S$1,200 net on your loan.
  • Personal Loans have higher interest rates – An amount around 3x to higher than some renovation loan offered. This then adds up to a higher monthly repayment and thousands of dollars in extra interest needed to be paid out by yourself.

But having to understand personal loan could potentially be higher, as a borrower of a home loan from a particular bank, you may also be approached for a “special” rate on a renovation loan. This is the bank’s way of rewarding “loyalty”. You could also see some banks might even offer a “promotional” rate of 8% interest for five years.

Too good to be true? Well, the idea is not to be caught up on the hype. The total amount you would need to pay back for a maximum loan of S$30,000 renovation loan is S$42,000 and that translates to S$12,000 in interest alone. The main thing is to know that a reasonable renovation loan interest rate is well below 8%.

As you can see, there’s a massive gap between how much interest you’ll pay for renovation loans and personal loans. But that doesn’t mean you should stop personal loans entirely.

In the end, just remember to exercise caution and make sure that you can afford monthly refunds. Check out best renovation loan for the lowest interest rate

When to consider - Personal Loan for home renovation

The common opinion is that, rather than a general loan like a personal loan, it is easier to opt for purpose-specific loans such as a renovation loan or a car loan; it is believed that purpose-specific loans give higher interest rates than personal loans.

To some extent this is true; banks often offer a better rate of interest for renovation and car loans because your house or car becomes the collateral that the bank can seize if you default on repayments.

In contrast, a personal loan requires no collateral. This carries the banks with a higher risk which they try to mitigate by charging a higher interest rate.

Additionally, interest in renovation loans and personal loans is measured differently. Renovation loan interest goes at a monthly rate of rest, meaning interest is calculated based on the loan’s outstanding balance. The interest also decreases over time as you pay off your outstanding loan amount each month.

By comparison, the interest on personal loans is measured on a fixed rate basis. That ensures personal use loans interest rates are measured on the basis of the amount of the initial loan. The monthly interest remains the same throughout, though the unpaid debt is falling over time. 

However, banks offer promotions on personal loans, either in the form of lower interest rates, fee waivers for processing, or many others;

How to find the best Personal Loan for Renovation in Singapore

While borrowers are spoiled for options when considering an acceptable loan for personal use, it is crucial that you understand your salary, the sum you need, and the ability to repay a loan. 

The key thing is to understand that, fortunately, Singapore has trusted financing sources, such as banks and moneylenders, that can provide you with the financial help you need. Be vigilant, though, because you are finding a loan to only deal with Singapore’s legal moneylenders.

Pro Tip: Remember, when comparing personal loan vs renovation loan, don’t rely on information found on their marketing materials. Always make it a point to phone the bank or visit the lender’s office to inquire which personal loan or any type of loan is for you.

Choosing the right personal loan lender

Once you decide to go this route, one of the difficult parts of securing a personal loan is choosing the right lender. Some of the good characteristics of a lender include having personalized offers, transparency, flexible loan repayment schemes, easy comparison, and full customer support.

The key thing here is to be knowledgeable and be equipped with what loans best suited to your needs. Your monthly income and credit cards history are just two factors out of many in considering which personal loan or renovation loan is perfect for you. Loans are never truly there to burden anyone but are there to get you out of tight spots, the key is to understand your available options. To better equip yourself, you can visit Loan Advisor.

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