Which is better, a home equity loan or a personal loan?

Question

New home owners are often wondering about certain loans that their banks are trying to offer them. A home equity loan is probably one of the most common and most often asked about. To sum it up in a few words, a home equity loan is basically using your home as collateral in order to get a loan which is often in the amount of a large sum of money. People generally take out home equity loans to finance major expenses that they just can’t afford at the moment. The most common thing people use these for is home repairs usually to update and remodel outdated bathrooms and kitchens. They are also commonly used to pay for medical bills or college tuition. The home equity loan puts a lien against the borrower’s property. In the case of one selling their home, this lien will have to be paid off first out of the money made from the sale of one’s home.… read full answer

In order to get a home equity line of credit the borrower will have to have an excellent credit score. The home also has to have a reasonable loan to value ratio in order to even be considered for the loan. For example, if your first mortgage is for $100,000 but your home has been appraised or assessed at $225,000 you have a great deal of equity available in your home. Home equity loans are almost always for a shorter term than the original or first mortgage. The loans are given in one lump sum and will often have a fixed interest rate which will always depend on the ever-changing market. Your bank will have all of these rates for you when you go and apply.

It is always best to shop around for the best terms and rates for your home equity loan. Don’t just think that you have to go to the bank that you normally do your business with. Take some time to go and talk with a home equity specialist at a few banks to see what is the best deal that will work for you. A little research will only help you in the long run.

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Answer 1 · 2019-11-28 08:38:29

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Adam McCann, Financial Writer

@adam_mccann • 11/28/19 This answer was first published on 07/15/19 and it was last updated on 11/28/19.For the most current information about a financial product, you should always check and confirm accuracy with the offering financial institution. Editorial and user-generated content is not provided, reviewed or endorsed by any company.

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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%.

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:

Category	Home Equity Loan	Personal Loan
Repayment period	5 - 30 years	1 - 7 years
Interest rates	4% - 8%	6% - 36%
Loan amount	Based on your home equity	$1,000 - $100,000
Secured?	Yes, by your home	Sometimes, mainly for bad credit
Typical credit score needed	680+	585+ (660+ for no origination fee)
Top 10 banks	5/10 offer	7/10 offer
Pre-qualification?	No	Yes

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.

Which is better, a home equity loan or a personal loan?

Adam McCann, Financial Writer

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