Financing your next home improvement

Here's advice on how to borrow and what to look out for, with some suggestions

It's difficult to beat a well-chosen home improvement for return on the money you invest.

This is particularly true in the U.K. where an endless -and growing - housing shortage is going to keep prices going up indefinitely

What’s more, some investments – even very simple ones - can give you a remarkably high return on your money. For instance, U.S. research suggests simply replacing your front door with a new one can give you a ROI of 95%.

When you think about it, that makes pretty obvious sense as apart from the view of the property itself the front door is usually the first thing people see.

But there are many other things you can do. A loft extension, a conservatory. A new kitchen: they all pay off to a greater or lesser extent. But do you have the kind of money to hand that you need to pay for things as expensive as those? And if not, where will you get the money?

The good news is that right now may be one of the best times ever for you to borrow money, because there is a price war between the lenders. Rates fluctuate, but as we write you can get a loan for as little as 3.1%.

But be very careful because personal loans are a minefield if you don't know what you're doing. You can end up paying far more for borrowing the same money from one source than from another.

For lesser sums a credit card is a better source of money than a loan; and one of the cheapest ways (if you're lucky enough to have the option) is to borrow from your employer.

The question is – assuming you don’t have a kind employer - which loans should you choose, and what should you avoid? Here are some of the things to look out for:

2. Check The Small Print

Before you apply for a loan, check for any catches. Some deals may look amazingly good – but have conditions you should watch out for. These tend to be based on the very reasonable idea that lenders give their customers better deals.

Take Sainsbury’s Bank. You can get as much as £15,000 for 3.2% for up to 5 years – an excellent deal - but you must have a Nectar Card and have used it at Sainsbury’s in the past six months.

In much the same way NatWest and RBS offer very good rates – but only give the best to current account customers.

4. Watch That Interest Rate!

Essentially you have to try and get the money you want at the lowest interest rate with as few restrictions and charges as possible. Some personal loans come with interest rates well below 10% while others may be 3 or 4 times higher.

Also remember that the more you borrow, up to a certain point, the better the rate. Thus you may have to pay 9% when borrowing £3,000 while it’s only 6% on £7,000. So it may pay you to borrow £7,000 instead of £6,500.

Those interest rates depend on your credit score, but lenders can charge whatever they like as long as the rate falls within the relevant laws. This means you may not actually get the interest rate advertised with the loan.

This is called the representative APR - Annual Percentage Rate). It’s the figure you see on posters or banks’ websites, but not everyone will qualify for it. In fact, loan providers only have to offer this rate to just over half (51%) of borrowers they lend to.

Your application will not necessarily be accepted. And if your credit rating is less than perfect you may be accepted but charged a far higher rate of interest than the representative APR.

Be careful when comparing annual percentage rates (APR). The APR can be manipulated. Always check the total amount you will pay – including interest, fees and principal – over the life of the loan. That’s the best way to work out what your loan will really cost.

How much will you actually pay to get the money in your bank account? Just as with a mortgage, upfront origination fees for the loan can vary widely.

7. Hidden Costs To Watch Out For

Check all the fees. How much will it actually cost you to get the money? Just as with a mortgage, origination or arrangement fees for the loan can vary widely.

Arrangement fees will be included in the APR, which is why you should compare APRs, not interest rates. They can make your loan much more expensive. Make sure you include them when you work out how much the loan is going to cost you.

What kind of interest rate is it? Some personal loans have variable interest rates, meaning they can go up or down. If you can only just about afford the initial repayments you should avoid this type of loan in case rates do go up.

Think carefully before buying any payment protection insurance (PPI) from your lender. This insurance covers your loan repayments if you have an accident, are ill and can’t work or lose your job.

However, if you do want this cover, you will almost certainly get a much better deal by checking prices with several different providers.