If you don’t have the cash on hand to buy land, you may have considered using a personal loan for the purchase. Using a personal loan to buy land can be an option, but there may be others depending on your financial situation. Here, you’ll get information that might help if you’re wondering if you can use a personal loan to buy land.
What Are Personal Loans?
Personal loans work as a flexible source of funds that can be used for a variety of purposes. Since they’re typically unsecured loans — there isn’t collateral backing them up — lenders may consider them high-risk loans.
Recommended: What Are Personal Loans Used For? And How to Apply
Why Use a Personal Loan to Buy Land?
A borrower might think about using a personal loan to buy land if they don’t have enough savings to buy outright the land they plan to build a home on.
A Personal Loan May Be Cheaper Than Other Financing Options
It may be a more affordable option to use a personal loan for a land purchase if you qualify for a lower annual percentage rate (APR) on the loan. If your credit score is high enough and you have a solid credit history, you might be able to find a personal loan with a better interest rate or more favorable terms than a land loan.
A Personal Loan May Offer Shorter Loan Terms
Some personal loans offer shorter loan terms than land loans. If you think you could pay off the personal loan quickly, it might make sense to have a shorter time frame to work with in order to pay down this debt before tackling the home mortgage debt.
Reasons Not To Use a Personal Loan to Buy Land
There are some things you may want to consider when choosing to finance for your land purchase, and whether a personal loan is the best type of loan for your financial situation.
• A personal loan might offer higher interest rates than other types of financing that are specifically for land purchases.
• Your credit may not be strong enough to get a personal loan for land at the rate you want.
• You might not receive favorable terms for a personal loan if your credit score is merely average.
• A personal loan will likely need to be paid off quicker than a land loan.
• Having a personal loan can affect mortgages and the rates or terms you may be offered. If you have multiple personal loans and a high debt-to-income ratio or if you apply for a mortgage within a short time after you borrowed the personal loan, your credit score could decrease, possibly affecting your mortgage qualification.
Recommended: 11 Types of Personal Loans & Their Differences
Personal Loan vs Land Loan
Personal Loan | Land Loan |
---|---|
Loan proceeds can be used for many purposes | Loan is specifically for purchase of land |
Can be secured or unsecured | Generally an unsecured loan |
Loan terms typically between one and five years | May have terms between 10 and 30 years |
Potentially high interest rates (10% to 25% APR) depending on applicant’s creditworthiness | More likely to have an APR of 4% to 5% depending on the type of land being financed |
Higher interest rate can mean the loan will cost more over time | Interest costs could be lower than on a personal loan |
Different Kinds of Land Purchases
Land to be purchased can come in a few different types. You might be looking at a plot of land that doesn’t have any improvements or a lot in a subdivision that’s ready for construction.
Raw Land
Land that has no improvements at all is raw land. There are no utility lines on the land, there may be no easy access to it, and it has typically never had housing developed on it.
Unimproved Land
A step up from raw land is unimproved land, which sounds like the same thing but is different in a few ways. Unimproved land generally has easier access than raw land — there may be a road leading to it — and it may have accessible utility lines — but no meters or boxes specifically for one home. It may never have had a home built on it, but it would likely be easier to do so than on raw land.
Finished Lots
A lot in a neighborhood or subdivision is generally referred to as a finished lot or improved land. There are typically completed roads and sidewalks and utilities ready to be hooked up to individual homes. The landscape may have been graded or leveled so a build can start relatively easily.
Raw Land | Unimproved Land | Finished Lot |
---|---|---|
No improvements whatsoever | May have nearby utility lines available to access | Generally, ready for building to start, with utilities and roads in place |
May not have easy access via any type of road | May have a road nearby or leading to it, but the road may be unpaved | Usually accessible via paved roads |
Offers creative freedom to potential home builder, within limits of any codes or ordinances in place | Likely similar to raw land, in that there may be few building restrictions | May be limitations to design, landscaping, and other aesthetics based on community guidelines |
What Type of Loan Should You Use to Develop Land?
Borrowing money to develop land involves some extra considerations beyond buying a lot in a subdivision. Thinking about what you want to do with the land, whether you have the time to manage a construction project, as well as whether you are prepared to take on more debt for a mortgage once the land is developed and ready for a build are all things that will need to be explored.
• Land Only Loan: This type of loan means you’ve secured a plot of land you may want to build on in the future, but you may not be ready to right now or you may still be looking for the right contractor to work with.
• Construction Loan: With this type of loan, you’ll work with a contractor to decide on a budget for the home construction and connect with a bank to get a loan that allows you to use loan funds as you need them, similar to a line of credit.
Alternatives to Land Loans and Personal Loans to Buy Land
A personal loan or a land loan are just two possibilities for financing a land purchase. If neither of those options work for your financial situation, you may want to consider others.
USDA Loans
The U.S. Department of Agriculture has loans available to help borrowers buy land. Section 523 loans can be used for housing to be constructed via a Self-Help method. Section 524 loans are designed for low-income and moderate-income families to buy land with more lenient home construction limits.
Recommended: What is a USDA Loan and Who Qualifies?
HELOC
A Home Equity Line of Credit (HELOC) is a line of credit secured by the equity in the borrower’s home. It’s often used to make repairs on a home or it can be used to purchase a rental property or improve an investment property. A HELOC may have lower interest rates than a personal loan.
SBA 504 Loans
These loans are designed for commercial real estate and construction. Usually, the borrower is using the SBA 504 loan for raw land, existing buildings, or purchasing or constructing a building on leased land. The business must occupy at least 60% of the land or building and have plans to occupy at least 80% within the next decade.
Seller Financing
Also called owner financing, this is a method of financing the land purchase in which the buyer repays the seller in monthly payments. An advantage to this method is that there generally aren’t restrictions on the types of land or construction that can be bought or sold with it and it can be used by anyone.
Considering a Personal Loan for a Land Purchase?
Deciding if you should use a personal loan to buy land is a decision that requires a lot of thought. Factor in your creditworthiness and how much money you need to borrow, what you plan to use the land for, as well as your target interest rate and loan term in your ideal scenario.
After researching the costs of buying vs. building a house, you might even decide that buying an existing home is the easiest option for you.
The Takeaway
Saving money for a cash land purchase may not be an option for you, or maybe you’d rather use your cash for other purposes. Whatever your reasons for financing a land purchase, there are a number of financing options available.
After comparing different options, you’ve decided that a personal loan is the right option for you, a SoFi Personal Loan could be a good fit. With no fees and competitive interest rates, an unsecured personal loan from SoFi could make that land purchase complete in a relatively short time.
Find your rate in just one minute.
Photo credit: iStock/Nicholas Smith
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Source: sofi.com