Can you use a personal loan to buy land?

If you’re buying a block of vacant land with ambitions to build your own property on the site, you may be able to pay for it with the help of a personal loan. But there are also other land finance options available that may better suit the financial needs of some borrowers.

Why use a personal loan to buy land? 

If plots of land are selling for relatively cheap, you may want to snap one up sooner rather than later.  This could allow you to more quickly benefit from capital growth and give you options to build down the track.

A personal loan can often be applied for faster than a home loan, as there is less paperwork and fewer checks to run through. This could potentially allow you to make your purchase that much sooner.

Personal loans often have shorter loan terms than a typical mortgage, so they can be paid off in years rather than decades. And by choosing an unsecured personal loan, you won’t risk losing your collateral following a default, like you would with a secured personal loan or mortgage.

However, it’s also worth remembering that personal loans often have higher interest rates than most home loans, and if you don’t have an excellent credit score, your rate could be even higher. Also, some lenders only offer personal loans for specific purposes (e.g. home improvement, weddings, holidays) and may not approve applications for personal loans to purchase land.

Alternatives to using a personal loan to buy land 

Some lenders offer land loans that are structured specifically for purchasing lots of vacant land. These loans are often similar to a mortgage, though they may have higher interest rates as land prices can fluctuate, increasing the loan’s risk.

However, they may allow you to borrow more money than a personal loan, which could let you purchase a larger block of land. You’re not obliged to start building or developing the land straight away, though you’ll likely need to source separate financing to do so.

If you’re buying land with the intention of building your dream home, a construction loan could help you pay for both the land and the building project. Unlike a typical mortgage or personal loan where you borrow the money as one lump sum, to be repaid plus interest in instalments over time, a construction loan lets you draw down money in stages as your construction project progresses. Once the house is built, the loan will revert to a more typical mortgage that’s secured by the value of the property.

Keep in mind that a construction loan may be more complex to apply for than a typical mortgage and may have specific eligibility criteria. Also, the lender will want to check each stage of the construction project before it will release more funds, which could add an extra complication to managing the project.

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