Home Equity Loan vs. Personal Loan
Choosing between a home equity loan vs. personal loan depends on personal preference and financial situation. Some homeowners may benefit from the advantages of a home equity loan, but personal loans may be less risky. Home equity loans, however, are secured debt and may have better terms.
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UPDATED: Jun 29, 2021
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- A home equity loan uses the difference between a homeowner’s property value and mortgage balance (their home equity) as collateral
- Advantages of a home equity loan include flexible terms, lower interest rates, and potential tax incentives
- A personal loan is usually unsecured and can be used for many different types of expenses
- Advantages of a personal loan include faster approval times, less paperwork for smaller loans, and no negative effects on your assets
Many people wonder about the advantages of a home equity loan vs. a personal loan.
Home equity loans can be beneficial for some homeowners, but personal loans may be less risky. Keep reading below to learn about the advantages of each and which is suitable for you.
If you’re searching for home equity loans or personal loans, enter your ZIP code above to compare rates from lenders in your area.
What are the advantages of a home equity loan?
With a home equity loan, the borrower receives the difference between their property’s value and their mortgage balance (known as home equity) in a lump sum that they will need to repay. Their home equity is used as collateral for the loan.
Is a home equity loan a good idea? Home equity loan advantages may be beneficial to some. These advantages include flexible terms, lower interest rates, and potential tax incentives.
The terms for a home equity loan can range from around five years to 30 years. You can also borrower larger amounts than a personal loan would allow.
The interest rate for a home equity loan is often lower than the interest rate for a personal loan since the borrower’s home equity secures it.
The interest may also be tax-deductible if the loan is used to buy, build, or improve the home.
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What are the advantages of a personal loan?
Personal loans can be used to cover a variety of expenses, including large purchases, weddings, vacations, bills, starting a business, and more. They are often unsecured.
The advantages of a personal loan include faster approval times, less paperwork for smaller loans, and no adverse effects on your assets.
Compared to home equity loans, personal loans usually have faster approval times.
Home equity loans may take a month or more to go through the same underwriting process as a mortgage, while personal loans may take as little as minutes or days.
If you’re looking to borrow a small amount of money, it may not be worth having to go through the lengthy, more involved underwriting process. Personal loans are often quicker with less paperwork and underwriting steps.
If you miss payments on a personal loan, you may damage your credit. However, if it is an unsecured loan, you will not lose your assets. Home equity loans may affect your ability to keep your home if you default.
Home Equity Loan vs. Personal Loan: Which one should I choose?
Choosing between a home equity loan and a personal loan depends on personal preference, but considering the advantages of each can help. You may also want to evaluate your financial situation to see which would be best.
Home equity loans can only be used by homeowners. It’s recommended that the homeowner have a significant amount of home equity before using these products.
They are extra helpful if you are looking for a larger loan amount than what a personal loan can provide.
Personal loans can be used by those who don’t own a home but still have the credit and earning potential to qualify. They are helpful if you are looking for funds quickly.
They may also be the better choice for a homeowner who is worried about their property value declining.
If you need help comparing home equity loans vs. personal loans, enter your ZIP code into our free loan comparison tool below.