Personal Loan vs. Home Equity Loan: How They Compare

If you're a homeowner, a home equity loan could be a great way to access cash to pay for renovations and other big expenses. The downside is, you may need to jump through the same hoops it took to get your mortgage – and you're putting your house on the line.

By comparison, a personal loan doesn't need collateral and the application process is simple. Click to find out more about personal loans vs. home equity loans.

Similarities: Personal Loans vs. Home Equity Loans

Both personal loans and home equity loans are types of installment loans, which means you borrow a fixed sum of money then pay it back in equal amounts until it's all paid off.

Here are a few more things these loans have in common:

• There will be a minimum and maximum amount you can borrow.

• You'll choose the term, or how long you want to borrow the money.

• You'll be offered a competitive, fixed annual percentage rate (APR) that includes the interest rate.

• At the start of your term, more of your payment will go towards interest than the loan amount (due to a process called amortization).

• Your monthly payments will always be the same.

• You can use the money for anything you like, from home renovations or repairs to a dream vacation, or debt consolidation.

Differences: Personal Loans vs. Home Equity Loans

A home equity loan may offer a chance to borrow more money than you would get through a personal loan – and the stakes are higher, too. 

Here are the key differences between these two handy loans:

• The APR for a personal loan will be based on your credit score. 

• The APR for a home equity loan will be based on the amount of equity you have and your loan term.  

• The limit on a personal loan might be based on your financial situation.

• The limit on a home equity loan will be based on how much equity you have. 

• No collateral is needed for a personal loan unless you aim to build or repair credit through a secured personal loan.  

• Your house serves as collateral for your home equity loan, so if you default on payments, your lender may seize your house. 

• Fees may be low or even zero for a personal loan.

• Fees for a home equity loan can quickly add up. Depending on your lender, you may need to pay closing costs, which can be a percentage of the loan amount.

Note: To find out how much home equity you have, take the current market value of your home and subtract your mortgage balance. 

When a Personal Loan Could Be Better 

A personal loan is relatively low stakes compared to a home equity loan. You can borrow the money you need to take care of your expenses, without worrying about losing a major asset.

Here's when a personal loan might be the better option for you:

• You want to borrow a fixed amount of money to pay for a particular project or item, like fixing a broken sink or buying a new refrigerator.

• You have a bunch of unpaid bills you need to catch up on, like healthcare or utilities.

• You have something fun coming up, like a weekend getaway or wedding planning in the works. 

• You want to use the loan as a rainy day fund to meet unforeseen expenses.

• You need access to funds but don't want to put your house up as collateral.

• You're a homeowner but haven't built up enough equity to get a home equity loan yet.

When a Home Equity Loan Could Be Better

A home equity loan is sometimes called a second mortgage. In other words, it takes a bit more time and effort to get a home equity loan compared to a personal loan – but the extra effort could be worth it. 

Here are the key reasons why you might consider a home equity loan.

• If you've built up enough equity, a home equity loan could be the most affordable way to fund major renovations, like a new kitchen, bathroom, or roof.

• If you use your home equity loan to "buy, build, or substantially improve" your home, the interest you pay on your loan could be tax-deductible.  

• You can use a home equity loan to pay for other major life expenses, like college tuition – or if you're funding an entire wedding.

• You can also keep some of the money aside for a family emergency fund, so you don't need to draw on your retirement accounts early.

Choosing Between a Personal Loan vs. Home Equity Loan

It's a matter of personal preference whether you decide on a personal loan or a home equity loan. Both types of loans have useful features to suit different needs and wants. 

If you can't choose, then the first question to ask is the most obvious: Do you have enough equity to qualify for a home equity loan? If that's the case for you, then the loan might be your best bet to pay for a remodel or other significant expense.

On the other hand, a personal loan is a simple, convenient option if you just want to clear a few bills and cross a few things off your to-do list right now. Click below to find out more about personal loans! 

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