What is the difference between a home improvement loan and a home equity loan?

The biggest difference between a home equity loan and a personal loan is that a home equity loan is secured by a house while a personal loan has no collateral in most cases. Home equity loans and personal loans also differ in terms of their repayment period, interest rates and the amount available to borrow. A home equity loan’s repayment period lasts 5 - 30 years, according to Experian, while a personal loan usually lasts 1 - 7 years. Interest rates on home equity loans typically range from 4% to 8%, while personal loans typically charge 6% - 36%.... read full answer

Personal loan amounts range from $1,000 to $100,000. Home equity loans, on the other hand, don’t really have an upper limit. That’s because home equity loans allow you to borrow against the value of your home, minus the amount you have left to pay on the mortgage, otherwise known as your “equity.” So the more valuable your house is and the more money you’ve paid on your mortgage, the higher your equity is and the more you can borrow.

Your home serves as collateral with a home equity loan. So if you default, the lender may be able to foreclose on your house to ensure they get paid. Most personal loans are unsecured, meaning the lender doesn’t have any collateral to take possession of if you default. But there are some personal loans that are secured, using things like auto titles, stocks or your next paycheck as collateral.

Both home equity loans and personal loans offer you a lump sum of money which you pay back over time along with interest charges. And when you apply for both, lenders will consider your credit score, income and other debts, among various other factors.

Home Equity Loans vs Personal Loans:

Conclusions: When to Get Home Equity vs Personal Loans

Home equity loans are better if you want more time to pay the loan off, lower interest rates and potentially larger loan amounts.

Personal loans are better if you don’t want to (or can’t) use your home as collateral, especially if you would like a larger variety of lenders to choose from. They’re also ideal if you want the opportunity to pre-qualify before applying.

Top Alternatives to Consider

It’s useful to note that there are several alternatives to using either a home equity loan or a personal loan. One alternative is a “home equity line of credit.” Unlike a home equity loan, which offers a lump sum of money, a home equity line of credit lets you borrow money whenever you need it during a set period of time. But there’s no obligation to borrow. You can think of it as a giant credit card that’s secured by your house.

For smaller borrowing amounts, credit cards are also an option, though their APRs tend to be more expensive than those of home equity loans and personal loans. However, there are some credit cards that offer an introductory 0% APR for a certain number of months.

Major personal loan requirements include being at least 18 years old, having a bank account, having a good credit history, and having enough income or assets to afford monthly loan payments. Specific personal loan requirements vary by lender, however. Avant requires a credit score of 600 or higher, for example, while ... read full answerProsper sets the bar at 640 and SoFi asks for 680. Most lenders don’t disclose annual income requirements, but two exceptions are LendingPoint ($20,000+) and Citibank ($10,500+).

Some personal loans may have additional requirements, such as collateral to secure the loan. Lenders will also look at plenty of other factors when you apply, including your existing debt, employment status and housing payments.

Personal Loan Requirements

18+ Years Old

A loan is a binding contract, and most states won’t let you enter into a binding contract unless you are at least 18. Lenders generally do not offer loans to minors as a result.

SSN and U.S. Residency

Many (but not all) lenders will only make loans to U.S. citizens and permanent residents. You may be required to have a Social Security number. Some lenders allow applicants to use an Individual Taxpayer Identification Number or a Visa instead.

Bank Account

Lenders usually send the funds as a direct deposit to a bank account. Certain types of loans, such as ones where you provide collateral, may not require you to have a bank account. But most loans will.

Steady Income

Lenders need to be confident that you will repay the loan. So you will need to demonstrate that you have a source of income and/or significant assets. Lenders don’t generally disclose minimum income requirements, but you must be able to manage your monthly payments in addition to any other debts/expenses you have.

Credit Score of 585-700+

Lenders require applicants to meet a certain credit score threshold for approval. The most popular lenders usually require a credit score of at least 585 to 700. However, these requirements aren’t set in stone. Having a high income might help make up for a low credit score, and vice versa.

Reasonable Financial Obligations

If the lender determines that you already owe too much money relative to your income and assets (i.e. the amount you can afford to pay back), you probably won’t qualify. Lenders will also consider monthly expenses like housing payments that will decrease the amount of money you can put toward repaying a loan.

Stable Employment

It’s not impossible to get a loan if you don’t have a job. But if you’re unemployed you’ll need a strong alternative source of income, such as a pension, government benefits or investments.

Bottom Line

Overall, good credit and disposable income are the two most important personal loan requirements. You can check your latest credit score for free as well as compare personal loans based on their minimum credit score requirements on WalletHub. Lenders will be able to provide more detailed information about other requirements.

Although each lender is a bit different, the basics of the application and approval processes are pretty much the same. You can take the same general approach to maximize your odds of success, too.

Personal loan applications require several key pieces of personal information, including your name, SSN/ITIN, address and date of birth, along with financial information such as your yearly income and monthly mortgage/rent payments. It usually takes less than 7 business days to get a decision and to receive your money if you’re approved.