There are many uses for a personal loan â including purchasing land. How you go about using a personal loan to buy land and whether itâs the right option for you may require you to get more familiar with this type of loan and the benefits and drawbacks of using it in this way.
Purchasing land to build a home farm or start a business is an exciting endeavor. However, land can be expensive, so financing may be necessary. If you don’t qualify for traditional land loans or other real estate financing, you may be wondering if you can use a personal loan to buy land.
While it is possible to use a personal loan for purchasing land, there are pros and cons to consider before choosing this route. In this comprehensive guide, we will explore whether a personal loan is a good option for financing land, alternatives for land purchase loans, and tips for getting the best rates and terms when borrowing.
What is a Personal Loan?
A personal loan is a fixed-rate installment loan that borrowers can use for almost any purpose. These unsecured loans are offered by banks credit unions and online lenders. With a personal loan, you receive the full loan amount upfront as a lump sum. You then repay the loan in equal monthly installments over a set repayment term, usually between 1-5 years.
Personal loans can be easier to qualify for than secured loans since they don’t require collateral. Lenders assess your creditworthiness mainly based on credit score, income, and debt-to-income ratio. Rates and terms for personal loans vary greatly depending on the lender and your financial profile.
Can You Use a Personal Loan to Buy Land?
The short answer is yes. Since personal loans can be used for virtually anything, you can take out a personal loan to purchase land. This provides an alternative to specialized land loans or construction loans which have stricter eligibility requirements.
However, there are limits on personal loan amounts, usually up to $50,000. So a personal loan may only work for buying smaller, less expensive plots of land. Those looking to purchase more extensive properties may need to look into other land financing options.
Pros of Using a Personal Loan to Buy Land
Using a personal loan to buy land has some potential benefits:
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Fast funding: Personal loans can be approved and funded in as little as 1-3 business days since there is no property to appraise. This is much faster than closing on a mortgage or land loan.
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Fixed rates: Personal loan interest rates are fixed for the full repayment term, so your monthly payments will remain consistent.
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No downpayment required: You can get a personal loan to cover 100% of the land purchase price without any downpayment.
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No home equity required: Personal loans are unsecured, so you don’t need home equity or other assets to qualify. This expands options for first-time land buyers.
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Flexible terms: Personal loans may offer terms as short as 12 months or as long as 5 years. Short terms mean less interest paid over the life of the loan.
Cons of Using a Personal Loan to Buy Land
There are also some potential drawbacks with using a personal loan for purchasing land:
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Higher interest rates: Personal loans tend to have higher interest rates than secured land loans or mortgages, often in the 10-30% range. This means higher costs, especially for larger loans.
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Limited loan amounts: Personal loan amounts max out around $50,000 usually, which may not be enough for larger land purchases.
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Shorter repayment terms: The 1-5 year terms mean higher monthly payments than longer-term land loans. Longer loans spread costs over more time.
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Credit score requirements: Good credit (660+ score) is usually needed to qualify for the lowest rates on personal loans. Poor credit borrowers may not qualify.
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No opportunity to refinance: Personal loans cannot be refinanced like land loans and mortgages can when rates decline. You’re stuck with the original loan terms.
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No chance to build home equity: Paying down a personal loan doesn’t build equity like making payments on a land loan would.
What are the Best Personal Loan Rates for Land Purchases?
Personal loan interest rates can vary dramatically based on your credit score and other financial qualifications. Here are some general guidelines on current rate ranges:
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Excellent credit (760+ score): Qualified borrowers may see rates as low as 6-12%
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Good credit (680-759 score): Expect rates in the 10-15% range
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Fair credit (640-679 score): Rates typically 15-25%
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Poor/No credit: May not qualify or rates 20%+
Strong credit means lower rates and better approval odds. Comparing loan offers from multiple lenders can help you find the best possible rate for your situation. Online lenders sometimes offer better rates than banks.
What Loan Amount Do You Need for Land?
Loan amount limits are a key consideration when using a personal loan to buy land. Here are some guidelines on personal loan amounts:
- Up to 1 acre: $15,000 – $30,000
- 1-5 acres: $30,000 – $50,000
- 5-10 acres: May need to look into alternatives that offer higher loan amounts
- 10+ acres: Personal loans won’t be sufficient, need specialized land loan
The size and location of the land will determine the purchase price. If you need to finance more than a couple acres or expensive land, a personal loan probably won’t provide enough borrowing capacity.
Alternatives for Financing Land Purchases
If a personal loan isn’t right for your situation, here are a few other options for financing land purchases:
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Land Loans – Specialized loans using the land as collateral. More borrowing capacity than personal loans.
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USDA Loans – Government-backed loans for rural properties. Low downpayments and rates.
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Seller Financing – The seller finances a portion of the purchase price directly.
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Home Equity Loan – Leverage equity in your current home via a second mortgage.
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401(k) Loan – Borrow from your retirement savings (risky, not recommended).
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Hard Money Loans – Asset-based loans from private lenders at higher rates.
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Crowdfunding – Raise funds from multiple online investors via sites like Kickstarter.
Each option has pros and cons to weigh based on your situation. Consulting a finance professional can help identify the optimal financing method.
Tips for Getting the Best Personal Loan for Land
If you decide a personal loan is the right option, here are some tips for getting the best rate and terms:
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Check your credit – Get a free credit report and fix any errors. Improving your score can mean better rates.
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Lower credit utilization – Pay down revolving balances like credit cards to get utilization below 30%.
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Compare offers from multiple lenders – Rates and fees vary, so shop around.
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Consider a cosigner – Adding a cosigner with good credit can help you qualify and get better terms.
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Opt for autopay discounts – Lenders offer rate discounts around 0.25-0.50% for enrolling in autopay.
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Choose shorter terms – You pay more interest overall with longer 5-year terms.
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Make additional payments – Paying extra each month saves on interest costs over the loan’s life.
With the right personal loan option, buying land can be an achievable dream. Weigh the pros and cons carefully and have a solid repayment plan in place before moving forward.
Frequently Asked Questions about Personal Loans for Land
Can you buy 5 acres with a personal loan?
It depends on the cost, but likely not. Most personal loans max out at $50,000, which may not be enough for 5+ acres. You’ll probably need a land loan or other alternative.
What credit score is needed for a personal loan for land?
Aim for a minimum score of 660 to qualify for a decent rate, but scores of 720+ are ideal for the lowest rates. Each lender has minimum score requirements.
Are personal loans for land a good idea?
They can be if you need quick financing, have good credit, and are buying a smaller parcel of inexpensive land. For pricier properties or more acreage, a land loan is likely the better option.
How much money do you need to buy land?
Land prices vary greatly based on size, location, zoning, utilities access, and other factors. As a very rough estimate, plan on at least $10,000-$15,000 per acre for undeveloped recreational land.
Can I get a personal loan to buy land if I have bad credit?
It may be challenging to qualify if your credit score is below 600. You may need a cosigner with better credit to get approved and a decent rate with poor credit.
The Bottom Line
Personal loans can provide a means of purchasing smaller plots of land quickly and easily. Just be sure to compare all your finance options thoroughly. Understanding the pros, cons, rates, terms, and loan amount limits is key to determining if a personal loan is the right choice. With the right preparation and research, you can make your land ownership dreams a reality.
Other Funding Options For Purchasing Land
A personal loan isnât the only funding solution for purchasing land. Below is a closer look at some alternative funding solutions.Â
A land loan is a type of secured loan that uses the plot of land as collateral on the loan. In general, borrowers will need a higher credit score to get approved for a land loan.
When using this type of loan, youâll likely need to provide extensive information about the land to the lender. Many lenders will want to know your plans for the plot, zoning, property lines and access to utilities.
Land loans come in several varieties, including raw land loans, unimproved land loans and improved land loans. Typically, raw land loans come with higher interest rates than improved land loans.
If youâre looking for a large loan amount, a land loan might be a better fit than a personal loan.
In many cases, land loan lenders expect their borrowers to convert land loans into construction loans. Construction loans are designed to cover the construction costs of a building. The funds from a construction loan are often used to pay off the land loan.
After the home is complete, the borrower will apply for a traditional mortgage on the house. Since the end goal of a construction loan is a traditional mortgage on a new home, lenders sometimes see less risk.
The U.S. Department of Agriculture (USDA) offers a suite of loan opportunities for prospective homebuyers in designated rural areas. Through Section 523 and Section 524 short-term loan options, you could use the funds to purchase a plot of land.
Like other USDA loans, you can expect to find relatively low interest rates through these loan options. If you choose a Section 523 loan, youâll be expected to provide labor for the planned construction project. But providing labor isnât a requirement for Section 524 loans.
If you have built significant equity in your current home, you could tap into that value to purchase a new plot of land. Like a personal loan, you can use the funds provided through a home equity loan for almost anything, including a land purchase.
Typically, home equity loans come with lower interest rates than personal loans. But home equity loans are secured by your home. If you default on your home equity loan, the lender could seize your home.
Before taking out a home equity loan, take a hard look at the numbers. You donât want to use this financing option if you might struggle to repay the loan.
A HELOC is a secured line of credit tied to the value of your home equity. If you have a substantial amount of home equity, you could tap into a HELOC to finance your land purchase.
HELOCs come with a credit limit. If youâre approved for a credit limit high enough to cover the land purchase, then you can withdraw the funds you need. Like a home equity loan, HELOCs come with the risk of losing your home if you donât keep up with your payments.
Seller financing is a unique arrangement that involves the current owner of the land lending directly to the new buyer. Seller financing isnât always available. If the seller is willing to provide this option, expect a relatively short repayment timeline of fewer than 10 years.
As the buyer, youâll negotiate the terms of the loan directly with the seller. While everything about the transaction is up for negotiation, most sellers require a significant down payment before moving forward.
When pursuing this option, it might be a good idea to get a real estate attorney onboard. As you move through the negotiations, itâs helpful to have a real estate professional to work on your behalf. After all, you donât want to get stuck with an unfavorable contract.
Can you use a personal loan to buy a piece of land?
Yes, itâs possible to use a personal loan to buy a piece of land. Most personal loan lenders allow you to use the funds for anything, including a land purchase. But a personal loan isnât always the best financing option for this type of purchase.