How should you fund your home improvements?

Homeowners who have recently moved into a new property may be planning do-it-yourself jobs or large-scale renovations, but they need to think carefully about how they're going to finance those home improvements.
Unless you're in the fortunate position of having a significant savings stashed away, options include borrowing on a credit card or taking out a personal loan.

Your decision will depend on factors such as how much you need to borrow, how soon you can pay it back, how disciplined you are - and your credit score.

Put it on your plastic

One option for funding home improvements is to put your purchases on a credit card offering a 0 per cent introductory purchase deal. Sainsbury's Finance and Tesco Bank, for example, are both offering 0 per cent for 12 months on purchases.* Borrowers could also consider one of the "best buy" balance transfer deals currently available. Santander is offering 0 per cent for 15 months and Virgin Money is offering 0 per cent for 14 months; balance transfer fees of 3 per cent and 2.98 per cent apply respectively.*

Look for a low-cost loan

The alternative for those looking to fund a DIY project is a personal loan. For a £5,000 loan over three years, you can currently get a rate of 8.8 per cent with Sainsbury's Finance, and 8.9 per cent with both Alliance & Leicester and Tesco Bank. However, before signing up, it's worth noting that in many cases it is currently cheaper to borrow slightly more money on a personal loan, as smaller loans are more expensive.
For example, for a loan of £10,000 over five years, both Tesco Bank and Sainsbury's Finance have a rate of 7.9 per cent.

Plastic or personal loan?

Traditionally, unsecured loans have been more popular than credit cards for home improvements, but rates have been rising fast - making plastic seem the more attractive option right now. But it's crucial that cards are not used simply to delay having to pay back the money borrowed.

"Clearly a 0 per cent credit card deal is cheaper for the duration of the 0 per cent offer, but you may not be able to roll it over onto another 0 per cent deal elsewhere when it expires," warns David Black from financial analyst, Defaqto. "This could mean the outstanding balance lasts for ages if you're not disciplined with your repayments."

Another issue is that you may not get offered as large a credit limit as you need when the 0 per cent offer ends. By contrast, with a personal loan, you choose the repayment period at the outset and interest rates and monthly repayments are fixed for that term.

"Provided you keep up with these repayments, there is the certainty the loan will be cleared over the chosen period," adds Black. At the same time, there are no upfront fees with a loan, and you are free to repay it at any time - although you do need to watch out for early repayment fees of one month's interest.

Consider your creditworthiness

In the current uncertain economic climate, both unsecured loan and card providers are concentrating on the credit quality of the prospective borrower, as well as affordability.

"Tighter lending criteria means only those with the best credit ratings and secure employment can access the best deals, while those with a poor credit rating are likely to be charged a higher rate of interest - or have their application refused altogether," says Black.

"More and more lenders are also reserving their best rates for existing customers who hold a current account or credit card, because they regard them as lower risk."

At present, the key to choosing between a credit card and loan really depends on your creditworthiness - the key is to ensure your credit file is up-to-date before applying.

Notes:
Rates correct as of 19/04/10
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Find out more about credit cards at http://www.confused.com