Land Loans: Using a Personal Loan to Buy Land
If you’re looking to buy a plot of land, you probably have some exciting plans for it. Less exciting is figuring out how to finance the land. Borrowers often turn to land loans to purchase property; however, using a personal loan to buy land provides an alternative with some benefits.
Personal loans can be easier to qualify for and quicker to obtain than land loans or construction loans. However, there are some drawbacks to this form of financing. We’ll explore what you need to know about using a personal loan to buy land.
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Using a personal loan to buy land
There are multiple ways to finance a plot of land. One option that borrowers may not typically consider is using a personal loan to buy land.
Personal loans are a financing option commonly offered by banks, credit unions and online lenders. Borrowers can use personal loans for nearly any reason — to pay off high-interest debt, fund a vacation or even buy land. Personal loans are usually unsecured, which means they’re not tied to an asset like traditional mortgages or car loans are.
Using a personal loan to buy land can provide advantages over other financing options. For example, personal loan borrowers avoid the lengthy approval process associated with other loans. Additionally, personal loans have fewer fees and don’t require down payments. However, personal loans often have higher interest rates than other financing options and may have smaller loan limits.
Personal loan eligibility requirements
Because personal loans don’t require collateral, lenders place a heavy emphasis on a borrower’s credit score and financial situation to determine their creditworthiness. Lenders typically look at the following criteria when analyzing applicants:
- Credit score: In addition to determining eligibility, a borrower’s credit score affects the interest rate and loan amount they are offered.
- Debt-to-income ratio (DTI): Lenders look for a low DTI because it indicates that the borrower can afford additional debt.
- Income: Lenders want to be sure a borrower’s income is steady, consistent and sufficient to repay the loan.
Personal loans vs. land loans
| Personal loan | Land loan | |
|---|---|---|
| Definition | An installment loan borrowers can use for almost any reason | A loan issued specifically to purchase a plot of land |
| Estimated APRs | Average APRs range between 14% and 32% for credit scores above 660; APRs may be as low as 6.70% or as high as 36% or more | APRs generally start around 7%, depending on the loan term and type of land loan |
| Loan terms | Typically one to 5 years, but some lenders offer longer terms | Short-term options range from two to 5 years; long-term loans range from 10 to 30 years |
| Loan amounts | Typically $1,000 to $50,000, but some lenders offer higher amounts | Amounts vary by loan type, but limits can be up to $200,000 or higher |
Personal loans are unsecured loans that borrowers can use for nearly any reason. Because no asset is involved, getting a personal loan is fast, straightforward and involves few fees. Often, borrowers can receive their funds within a few days of applying.
Land loans are specifically meant for purchasing a plot of land. Securing a land loan is more complicated than getting a personal loan or even a traditional mortgage. Land loans have strict qualifications and require significant down payments ranging from 15% to 35%. There are also several fees and closing costs associated with getting a land loan.
Although personal loans have fewer fees, they often have much higher interest rates than land loans because they are unsecured. Also, depending on the cost of the plot of land you’re considering, a personal loan may not offer high enough loan amounts to cover the cost, and you won’t have as many years to repay the debt.
Using a personal loan to buy land may be right for borrowers who are looking to finance an inexpensive plot of land or want a short-term financing option. Land loans, on the other hand, may be better for consumers looking for larger loan amounts and longer repayment terms.
Pros and cons of buying land with a personal loan
Using a personal loan to buy land can be a financially savvy alternative to land and construction loans. However, this financing option does have some drawbacks.
Pros
Fast approval process: Getting a personal loan is a relatively quick process. Borrowers typically receive funds within a week of applying, and some lenders even offer same-day funding.
Loan is unsecured: Because most personal loans are unsecured, there’s no property to verify and appraise. This can make it easy and fast to qualify for a personal loan. And if you encounter issues repaying the loan, you won’t risk losing any collateral.
No down payment: There’s no down payment when you take out a personal loan. Borrowers can finance land without putting any money down if the loan amount is sufficient to cover the price of the land.
Fewer fees: Personal loans often have an origination fee equal to a percentage of the loan amount, but they don’t involve other costs typically associated with land loans and home mortgages. And some lenders offer no-fee personal loans.
Cons
Smaller loan limits: You can typically borrow up to $50,000 with personal loans, which may not be enough to buy the land you have your eye on. (Note: Some personal loan lenders do offer higher loan amounts.)
Shorter terms: Personal loans usually have repayment terms between one and five years. The shorter time frames mean larger monthly payments compared to longer-term financing options.
Emphasis on credit score: With no collateral, the approval decision relies heavily on a borrower’s credit score and other aspects of their creditworthiness. Only borrowers with excellent credit are likely to qualify for the most favorable loan terms.
Higher interest rates: Personal loans typically have higher interest rates than construction loans and land loans.
Should I choose a personal loan for land?
Using a personal loan to buy land has its advantages. The process is fast and direct; approval and funding take days instead of weeks. Borrowers also pay fewer fees because there is no asset to verify or appraise. Personal loan terms are short — typically ranging from one to five years — so they can be a good option for borrowers looking to fund a plot of land quickly and with short-term financing.
On the other hand, interest rates on personal loans can be much higher than other financing options, especially if you don’t have excellent credit. And the lower loan amounts can be limiting. Using a personal loan to buy land may not be a good option for borrowers who are looking to finance an expensive property, have less-than-perfect credit or want a long-term option.
Alternatives for land financing
Borrowers have a few different options for financing a land purchase.
USDA loans
The U.S. Department of Agriculture (USDA) has two loan programs for purchasing land in rural areas — Section 523 and Section 524. Both USDA programs offer short-term loans with below-market interest rates. However, these programs are limited to nonprofit organizations purchasing land to develop housing for low- and moderate-income families.
Home equity loans or home equity lines of credit
Another option consumers can consider is using the equity from their current home to purchase a plot of land. Also called second mortgages, home equity loans are fixed-rate installment loans based on the available equity in a home. Home equity lines of credit (HELOCs) are similar but work like a credit card that a borrower can access as needed during a set timeframe.
Like personal loans, borrowers can use home equity loans and HELOCs for any reason. Unlike personal loans, home equity products are tied to an asset, so interest rates will be lower than unsecured loans. To qualify, borrowers must have enough equity in their home and will have to pay closing costs — typically 2% to 5% of the loan amount.
Construction loans
If you plan to immediately build a home on the land you’re purchasing, you may consider taking out a construction loan. There are different types of construction loans, including short-term loans that become due once the house is built, loans that convert to traditional mortgages and loans that finance the renovation of an existing home.
Construction loans typically require larger down payments and have stricter borrower qualifications than home loans. But because they are funding an asset, they will have lower interest rates than personal loans.
Frequently asked questions
Yes, borrowers can finance a plot of land only — whether they plan to place a mobile home on it or hold on to the lot for a while before building on it. Not all lenders offer land loans, and they are usually harder to qualify for than construction loans or home loans.
Land loan interest rates depend on the loan type and the kind of land you’re purchasing. Currently, land loan interest rates start around 7%, but your credit score and the loan term will impact the rate you receive.
The minimum credit score for a land loan depends on the exact loan type. Generally, land loan requirements are stricter than home mortgages, so lenders require higher credit scores than traditional home loans. Credit score minimums for construction loans also vary depending on the loan program. For example, the minimum credit score for an FHA construction loan is 500, while a conventional (non-government) construction loan will likely require a 680 credit score or better.
Getting a personal loan to buy land may be a little challenging if you don’t have excellent credit, but borrowers with subprime credit still have options. Some lenders that offer bad credit personal loans accept scores as low as 300. However, expect to pay significantly higher interest rates than borrowers with good credit scores. To find the best rate for your situation, compare rates and fees among various lenders including traditional banks, credit unions and online lenders.