How do renovation loans differ from personal loans?

How do renovation loans differ from personal loans?

Loans are an important aspect of financial services as they help individuals overcome cashflow shortfalls for various purposes – be it for education, business needs, household expenditure, or simply an expensive purchase.

The most common form is the personal loan, a helpful tool to tide over emergencies or address temporary financial troubles. A personal loan can also be used to fund expensive purchases that can be amortized over smaller monthly payments. Financial institutions such as banks provide personal loans based on borrowers’ credibility. Personal loans are often preferred because they can be used for a variety of purposes.

Home renovation is one common example of what a loan is used for. Of course, there is also a possible scenario wherein a home requires urgent repairs or where certain elements are posing a safety threat. This could take the form of electrical or plumbing requirements – repairs that need immediate attention. Alternatively, you may simply be contemplating long-desired changes to your home just to break the monotony and refresh your space. The reasons can be endless – you may possibly just be bored of looking at the same dull light fixtures, perhaps wish to install better sound insulation to complement the high-end stereo system for movie nights, or just change things around.

Getting this kind of work done can be expensive. At times, it may not be possible to have the required cash upfront to pay for renovations at your home, or you would rather incur the cost over a period of time instead of making a singular dent in your savings. That is why there are various funding options available, including a personal loan and a renovation loan. In deciding which loan to pick, it is important to first explore which one will best suit your requirements.

When looking at personal loan options, one must narrow down on the lender carefully. Should one fail to do so and make a less than optimal choice, it can mean paying more in interest costs or hidden costs over the loan duration, which is never ideal.

Using renovation loans

A renovation loan, as the name suggests, is a loan facility availed solely for the purpose of refreshing one’s home, be it for new furniture or fixtures, fresh lighting, a major remodelling or perhaps even extensive repairs. All of this costs money – and sometimes, a lot of it!

After you envision what changes you’d like to see in your home and determine how much it will cost you, comes the next step of determining how to pay for these expenses. Given renovation can result in large expenditure, one option is to borrow money from a financial institution and pay in instalments and/ or at a more convenient time, instead of bearing the burden at one go. Even if one is not financially constrained, borrowing money to pay for large expenditures such as for renovation could be a financially more feasible option.

One option is a renovation loan to fund your home makeover project. Rather than tapping into your savings, opting for a renovation loan can allow you the comfort of not having to worry about cashflow, but still accomplish the desired makeover for your home.

What about personal loans?

A renovation loan is not the only funding avenue available in the market. In fact, other options may suit your needs better. Renovation loans can only be used for the intended purpose and the capital borrowed cannot be diverted towards any other area of spend. One key requirement that must be complied with is that the renovation loan applicant must either furnish proof of owning the home or being a family member of the homeowner of the home that he or she wishes to renovate.

In such a context, a personal loan allows the borrower more flexibility. This is one if its biggest advantages over renovation loans. When one takes a personal loan, the sanctioned funds can be used at the borrower’s discretion, including for the renovation of a home.

As with any loan, the applicant must meet the bank’s eligibility criteria. At Standard Chartered Bank , we have structured an easy to follow process that allows quick decision making and instant cash disbursement with CashOne Personal Loan.

Eligible criteria and maximum loan amounts

A credible past borrowing record is an essential prerequisite to obtain any kind of loan, and the loan amount is determined by an individual’s income. Banks will usually approve a maximum sum of up to four times an applicant’s monthly income. In the case of a personal loan, the amount could be as high as S$250,000.

However, renovation loans are much smaller in size, up to S$30,000. The key benefit of a renovation loan is lower interest rate as compared to a personal loan. It is possible to secure a renovation loan at an EIR of below 5 per cent, but it is eventually a trade-off between lower interest rate and greater flexibility and loan amount for personal loans. 

A personal loan is usually more expensive and over the repayment schedule, it will likely cost the borrower considerably more. Both forms of loans will typically extend a maximum term of five years for repayment.

Before settling on the type of loan, you would need to determine your comfortable monthly repayment amount. A well-reasoned analysis will allow you to budget your monthly expenses efficiently, so your loan repayments do not greatly impact your budget.

It is often tempting to think the added expense will not make a dent in the existing finances, and more often than not, the borrower absorbs the impact of the added commitment after a few months. It is important, however, to consider one’s repaying ability when taking a loan to avoid future stress.

Personal loan vs Renovation loan

Application process

At Standard Chartered Bank we understand there are times when a loan is needed for immediate needs. Our CashOne Personal Loan application process allows you to instantly receive funds in the bank account of your choice upon approval.

For example, if you have home renovation in mind, you will work out an estimate of the total expenditure expected. Once you have a fair idea of what you desire and—perhaps more importantly—how much you wish to spend, you can begin shopping for a loan.

As an applicant, you must be between 21-65 years of age and have a minimum annual income of at least S$20,000. Existing Standard Chartered credit card holders do not need to furnish any documents unless you would like us to review your credit limit. The same applies to SingPass holders applying with MyInfo.

If you’re a salaried or partial commission-based earner, you must furnish a copy of your NRIC along with current computer-generated pay slips. In case the latter cannot be produced, there is also the option to submit your latest six months’ CPF Contribution History Statement. If the loan amount is considerably high, the bank will also require a copy of your latest Income Tax Notice of Assessment (NOA) from the IRAS in addition to the documents named above.

For those whose earnings are solely commission-based or are self-employed, a copy of the NRIC along with either the latest NOA or the most recent three months of commission statements will suffice.

A renovation loan typically requires fulfilling similar criteria. The key difference is that the funds can strictly be used only for the purposes of renovation, unlike a personal loan.

Making a choice

It is generally wiser to get a personal loan instead of a renovation loan as it allows greater flexibility. This is an important consideration because one may be able to use the funds for issues that arise unexpectedly such as cashflow shortfall. Should all go well, the loan borrowed can be used for renovation purposes as initially planned.

As long as the borrower repays the loan on time, there is no downside.

However, unforeseen circumstances such as permanent disability or death, are not protected for in a personal loan. In this context—and assuming the loan obtained was primarily for a home makeover—a renovation loan can be more advantageous. This is because certain renovation loans are issued with an inbuilt insurance policy. In the unfortunate scenario where a borrower dies prematurely or is permanently disabled, the insurance company will pay the bank the remaining loan amount. The insurance premium payable could be equivalent to 1 per cent of the loan amount.

The bottom line

Loans allow the addressing of immediate cash needs, but there is a need to be responsible in terms of assessing one’s repayment abilities. Before embarking on your renovation, you should determine which type of loan best suits your needs – a personal loan or a renovation loan. A personal loan allows you to borrow a higher sum of up to S$250,000 and use it at your discretion. On the other hand, a renovation loan can only be sanctioned for a maximum sum of S$30,000.

But flexibility is a key consideration of any loan, and it is in this context a personal loan scores better than a renovation loan. A personal loan is a better choice for a home makeover or any other expenses.

Find out more about Standard Chartered’s CashOne Personal Loan.

This article is brought to you by Standard Chartered Bank . All information provided is for informational purposes.