We all need access to a little extra capital sometimes. A loan can help you cover emergency expenses, upgrade your home, or accomplish other goals you have for your money.
When you're thinking about how to get a loan, there are a number of options, so it’s important to understand how to get the best bang for your buck. If you’re trying to decide between a home equity loan vs. personal loan, this guide can help.
Home equity loan vs. personal loan: A comparison
In general, a home equity loan is based on the ownership — or equity — you have built up in your home. The more value you have in your home, the more you can borrow. A personal loan, on the other hand, is debt that is largely based on your individual credit and income situation.
|Home equity loan||Personal loan|
|Interest rates||Can range from about 3% to 11%||Can range from about 5% to more than 30%|
|Maximum loan amount||Depends on equity in the home||Ranges from a few thousand up to about $100,000|
|Time to fund loan||Weeks||Days|
|Fees||Often 2% to 5% of the loan amount||Often 1% to 8% of the loan amount|
|Access to line of credit||Yes||No|
What is a home equity loan?
A home equity loan is one that’s based on the equity you have in your home. You determine your equity by subtracting the balance you owe on your home from its value. So, if your home’s market value is $250,000 and you owe $160,000 on it, the equity in your home is $90,000.
It’s important to note, however, that some lenders won’t let you borrow the entire amount of the equity in your home. In some cases, you might still be required to maintain a loan-to-value ratio of 80%. That means you may only borrow up to a point where your total loan balance is no more than 80% of your home’s value.
In the case of our example above, your loan balance shouldn’t exceed $200,000. Now, if you subtract the $160,000 you presently owe, the remaining equity for a loan is $40,000.
In many cases, it can take at least two weeks to get a home equity loan, and sometimes it takes up to six weeks. It depends on the situation and the complexity of the loan.
What is a HELOC?
In general, a “regular” home equity loan is one that comes with regular installment payments over a set period of time. However, it’s also possible to get a type of home equity loan known as a home equity line of credit (HELOC).
With a HELOC, instead of repaying the debt in regular installments, your loan is treated more like a credit card backed by your home’s value. You can withdraw money as needed, and as you repay the loan, you free up more credit.
What can a home equity loan be used for?
For the most part, a home equity loan or HELOC can be used for just about anything you choose, including emergencies, education, weddings, or vacations. It’s also possible to use your home equity loan to consolidate high-interest debt.
Depending on your credit situation, you might be able to get a lower interest rate with a home equity loan than with a personal loan because your home’s value is used as collateral. However, it’s important to note that recent changes to the tax law mean that you can only deduct the interest on your home equity loan if the money is used to make home improvements.
Pros and cons of home equity loans
There are a number of things to consider before you get a home equity loan. Here are some of the advantages and disadvantages you might see.
- Might be able to get a lower interest rate than with a personal loan
- Might be able to borrow a larger amount
- Some of the interest might be tax-deductible
- With a HELOC, you can use money as needed without applying for another loan
- You could lose your home if you don’t make payments
- Might face higher origination costs and fees in some cases
- Takes longer to be approved and to be funded
What is a personal loan?
While a home equity loan is based on your ownership of property, a personal loan is based almost entirely on the personal details of your credit score and your income. How much you can borrow and the terms you receive depend on the lender’s assessment of your ability to repay the loan. Most personal loans are made as installment loans, so you have a set repayment schedule and often a fixed interest rate.
If you have very good credit, you might get a comparable interest rate on a personal loan vs. a home equity loan. There are also personal loans made for those with poor credit, but they often come with much higher rates.
In many cases, it’s possible to be approved for a personal loan in a matter of minutes and receive funding in a few days. It’s not uncommon for online personal lenders to complete the process in one or two business days, although it might take up to seven business days to get your money.
What can a personal loan be used for?
A personal loan can be used for almost anything. Because it’s personal, you can use it for emergencies, debt consolidation, vacations, special occasions, and even home improvements.
While some lenders place limits on what you can use personal loans for, such as not allowing the money to be spent on education expenses or gambling, there are usually very few restrictions to personal loans. They also come with the advantage of being largely unsecured debts, so you aren’t putting your biggest asset at risk when you get a personal loan.
Pros and cons of personal loans
As with any type of financial product, there are some upsides and downsides to personal loans. Here’s what you need to know.
- Good credit leads to lower rates
- Even those with bad credit can usually get a personal loan
- Many loans are unsecured, so you don’t risk losing valuable collateral
- It’s possible to get your money much faster
- Many personal lenders don’t charge origination fees
- Interest rates can be much higher if you have poor credit
- Loan amounts might be smaller
- Creditors can sue you for repayment
- If you want more money, you have to apply for a new loan
Is it better to get a personal loan or home equity loan?
When choosing between a home equity loan vs. personal loan, it’s important to understand your own needs. One isn’t inherently better than the other. Instead, each has its own advantages based on your situation. Some of the items to consider when making your choice include:
- How much do you need to borrow? If you need a large amount of money and you have the equity available in your home, it can make sense to gravitate toward a home equity loan. However, if a smaller amount will do, a personal loan can be a better choice.
- How fast do you need the money? The faster you need the money, the more likely it is that a personal loan is the way to go. A home equity loan can take weeks to be approved and funded, while you might be able to get a personal loan in a matter of days.
- What’s your credit situation? If you have poor credit, you might not qualify for a home equity loan — even if you have value built up in your house. You might need to get a personal loan, even though it costs you more.
- What will the money be used for? Consider what you’ll use the money for. Do you want to consolidate your unsecured debts? A personal loan might make more sense. Are you making home repairs and want to deduct the interest? A home equity loan might be a better choice.
- Will you need more money later? If you don’t want to re-apply for more money later, a HELOC can be a good choice. With a HELOC, you only get money as you need it, and more is freed up as you pay your balance.
Additionally, compare the rates and terms you can get with a home equity loan or personal loan. Look at loan costs, how much you’ll pay in interest, and whether the payments are affordable. Compare your options and make the choice that’s best for your individual situation.
In the end, whether a home equity loan or personal loan is right for you depends on your situation and the deal you can get from the best mortgage lenders. Each type of loan has its advantages and disadvantages. Carefully consider your financial circumstances and get the loan that offers you the best deal for your money.