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If you can’t find your dream house to buy, you might consider building it instead. Building a home typically begins with finding land to build it on, but financing land can be trickier than taking out a traditional mortgage.
You might choose to use a land loan or construction loan from a bank or credit union, but personal loans can also be an option. Let’s look at how to use a personal loan to buy land and when you might choose to go this route.
Can I use a personal loan to buy land?
In most cases, yes, you can use a personal loan to buy land. Personal loans are typically unsecured loans with fixed interest rates and repayment periods between one year and 10 years.
Lenders often approve and fund personal loans quickly, sometimes even the same day you apply. You might choose to go this route to buy land if you need to move quickly, or if you want to avoid the time-consuming underwriting and appraisal process, and closing costs of a mortgage or traditional land loan.
Personal loans have few restrictions on what you can use them for, though many people use them to consolidate debt or finance a major purchase like a vacation, home repairs, or wedding. Some personal loan lenders advertise that their loans can be used for a land purchase. But you’ll want to make sure that your personal loan lender allows you to use loan funds for a land purchase.
Many lenders spell out any restrictions on their websites. You can also ask a loan officer before you apply.
You can research personal loan lenders and compare personal loan rates using Credible.
How does a personal loan to buy land work?
Getting a personal loan to buy land isn’t much different from getting one for any other purpose. You’ll start by shopping around for the best deal, using a site like Credible to compare offers or by researching loan options, interest rates, and fees from several different lenders.
Personal loan lenders often allow you to fill out a short form and get a personalized quote using only a soft credit check, which shouldn’t affect your credit score. When you’ve found the lender you want to go with, you’ll fill out a full application and go through a hard credit check before signing the final documents and getting the money deposited into your bank account. This hard credit inquiry can temporarily lower your scores by a few points.
Personal loan interest rates are highly dependent on your credit score. People with better credit scores will qualify for better rates. The rate you’ll pay on a personal loan may be affected by the purpose you’re using it for, but some lenders don’t require you to disclose that information. Lenders are typically more concerned about whether you’ll be able to repay the loan.
As you shop for a personal loan to buy land, be sure to pay attention to a few factors:
Interest rate or APR — This is the money you pay the lender as the cost of borrowing money. Most personal loan lenders advertise their rates as APR, or annual percentage rate. This includes the interest rate and any fees you pay and represents the total cost of borrowing money.
Fees — Personal loans may have origination fees, typically charged as a percentage of the loan amount and taken out of the money you receive. With a good credit score, you can usually find a personal loan without an origination fee.
Loan terms — This is the length of time you have to repay the loan. The longer the term, the lower your monthly payment tends to be, but the more you’ll pay in interest over the life of the loan.
What are the pros and cons of a personal loan to buy land?
A personal loan isn’t the only way to purchase a parcel of land, so it’s important to weigh the pros and cons of all your options before choosing a finance method.
Fast closing times — Personal loans are delivered quickly, sometimes the same day but generally within a few days of completing your application. Traditional land or construction loans from a bank can take weeks to close.
Fewer fees — If you have excellent credit, you can generally find personal loans that don’t come with fees. Other options for buying land will have down payment and closing cost requirements that can add up quickly.
Flexibility — With few restrictions on how you use personal loan money, you’ll be able to easily shift money toward other land-related expenses if you need to.
Unsecured — Personal loans typically don’t require collateral, so the land you’re buying isn’t considered collateral for the loan.
Potentially higher interest rates — As an unsecured loan, personal loans can have much higher interest rates than mortgages and other secured ways of buying property. The better your credit score, the better the interest rate you’re likely to be offered. People with lower credit scores may be better off trying to qualify for a traditional land loan.
Shorter repayment periods — Personal loans often have repayment periods between three and seven years, though you can find loan terms of 10 to 12 years from some lenders. The shorter your loan term, the higher your monthly payment is likely to be. Mortgages can have terms of 30 years, meaning your monthly payment would likely be much lower.
Smaller loan amounts — Personal loan lenders will have limits on the maximum loan amount you can get. This can be as low as around $35,000 or $50,000, though some personal loan lenders allow you to borrow up to $100,000 depending on your credit score. Depending on the cost of the land you’re buying, a personal loan may not offer enough money.
May not be available from all lenders — Some personal loan lenders may prohibit borrowers from using their loans to buy land. It’s important to check with the lender before moving forward with a personal loan to buy land.
Where can I get a personal loan to buy land?
Most personal loan lenders have few restrictions on how you can use the money you borrow. In most cases, restrictions include prohibitions on using the money for financial investments and illegal activity or gambling.
Some lenders don’t allow borrowers to use their loans for educational expenses. In most cases, lenders will spell out what their loans can be used for and any restrictions on their websites. Check with the lender before closing on your personal loan.
Credible makes it easy to compare personal loan rates from multiple lenders.
What’s a land loan and how does it compare to a personal loan?
Personal loans may not always be the best option for buying land. You might also consider other types of loans, such as a land loan from a traditional bank or credit union.
A land loan is basically a mortgage loan on a property that doesn’t have a home on it. The land serves as collateral for the loan, meaning you can lose it to foreclosure if you don’t make your payments. Personal loans generally don’t require any collateral.
Interest rates on land loans are often higher than for a traditional home loan. As a secured loan, land loans may offer lower interest rates than what you’d get on a personal loan, depending on your credit score.
Land loans include closing costs and typically require you to make a down payment of 15% to 35% depending on the type of land. These can include:
Raw land — This is land that doesn’t have any utilities or improvements, like water and sewer lines or road access.
Unimproved land — This piece of land may have a few basic improvements, old structures like a barn, or have had a home on it previously. This may also be called undeveloped land.
Improved land — These properties typically have water and sewer lines and road access and are ready for home construction. Loans for improved land may be called lot loans.
The more improved the land, the safer lenders tend to consider it and the lower your down payment tends to be. Some lenders have different loan programs depending on the type of land you’re purchasing. But not all lenders offer land loans. You’ll need to shop around to find a lender experienced with lending for land purchases.
About the author: Andrew Dunn is an award-winning mortgage and finance writer with a decade of experience in covering personal finance. He’s written for LendingTree, where he was previously managing editor for mortgage content, Credit Karma, Business North Carolina magazine and the Charlotte Observer. His work has been recognized by the Society of American Business Editors and Writers, and the N.C. Press Association.