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If you’re looking for a responsible and cost-efficient way to finance big-ticket expenses like home improvements or unexpected medical bills, a home equity loan or personal loan could be the solution.
- What are the differences between a personal loan and home equity loan?
- How much do you want to borrow?
- What do you need the money for?
- How fast do you need the money?
- What interest rate can you qualify for?
Learn how to quickly and easily evaluate your own situation with these factors in mind, and choose what’s best for you when deciding on a personal loan vs. home equity loan.
|Home equity loan||Personal loan|
|Tax break on interest?||Yes, for home improvement||No|
|Fast approval and funding||No||Yes, for qualified borrowers|
|Loan limits||Typically 80% of your combined loan-to-value (CLTV) ratio||Typically between $2,000 and $100,000, but depends on borrower qualification and lender limits|
How personal loans are different from home equity loans
Here are a couple of the major differences between personal loans and home equity loans.
Secured vs. unsecured
The main difference between a personal loan and a home equity loan is that most personal loans are unsecured loans. With a home equity loan, you’re putting your house up as collateral as a guarantee that you’ll repay the money you owe — that’s a secured loan.
What does it mean to put your house up as collateral? As long as the loan is outstanding, the lender has a lien attached to your property. That means you’ll have a hard time selling your home unless the lender gets paid off in the process. If you start missing payments, the lender might even initiate foreclosure proceedings against you to force you to repay.
Although personal loans are unsecured loans, that doesn’t mean there aren’t consequences if you fail to repay it. If you default on your unsecured personal loan, the lender can hand you off to a collection agency or seek a court judgment against you. As a last resort, you might get some relief by declaring bankruptcy.
You might think that because you’re putting your house up as collateral, you’ll be able to borrow more if you choose a home equity loan.
That’s not necessarily the case — it depends on how much tappable equity you have in your home. The equity you have in your home is the difference between what your house is worth, and how much you still owe on your mortgage. Tappable equity is the amount of money a lender will let you withdraw.
Home equity loan limits
Most lenders won’t allow you to tap every last dollar of your home equity. Typically, your combined loan-to-value (CLTV) ratio can’t exceed 75% to 90%. To find the maximum loan amount you could borrow against your home, you’d multiply your home value by the lender’s CLTV limit.
If your home’s market value is $300,000 and your lender’s CLTV is 80%, you could qualify to borrow up to $240,000 against your home.
So in this example, you would have $240,000 in tappable equity if you didn’t have a mortgage and owned your house outright. If you had an existing mortgage of, say $200,000, you’d have $40,000 in tappable equity.
There are several ways you can tap your home’s equity: through a second mortgage, lines of credit — like a home equity line of credit (HELOC), or a cash-out mortgage refinance. Your CLTV will come into play with each.
Personal loan limits
With a personal loan, there are two primary factors that determine how much you can borrow:
- The individual lender’s maximum loan limit
- Your debt-to-income ratio (DTI), which is how much of your current income is needed to take care of your existing obligations
Although many lenders will provide personal loans of up to $35,000, others have even higher limits, up to $50,000, $100,000, or more.
The personal loan companies in the table below compete for your business through Credible. You can request personal loan rates from all of these partner lenders by filling out just one form (instead of one form for each) and without affecting your credit score.
|Lender||Fixed rates||Loan amounts|
|9.95% - 35.99% APR||$2,000 up to $35,000**||Get Rates|
*If approved, the actual loan terms that a customer qualifies for may vary based on credit determination, state law, and other factors. Minimum loan amounts vary by state.
**Example: A $5,700 loan with an administration fee of 4.75% and an amount financed of $5,429.25, repayable in 36 monthly installments, would have an APR of 29.95% and monthly payments of $230.33.
|5.99% - 29.99% APR||$2,000 up to $35,000||Get Rates|
|6.99% - 29.99% APR||$10,000 up to $35,000||Get Rates|
|6.95% - 35.89% APR||$1,000 up to $40,000||Get Rates|
†Based on a majority of borrowers from LendingClub's marketing partners who were issued loans between 1/1/19-12/13/19. The time it takes for your loan to be funded may vary.
|15.49% - 34.99% APR||$2,000 up to $25,000||Get Rates|
|4.99% - 16.79% APR||$5,000 up to $100,000||Get Rates|
|6.99% - 28.99% APR1 (For NY residents: 6.99% - 24.99% APR)||$3,500 to $40,0002||Get Rates|
1Rate reduction available for AutoPay.
2You may be required to have some of your funds sent directly to pay off outstanding unsecured debt.
3After making 12 or more consecutive monthly payments, you can defer one payment as long as you have made all your prior payments in full and on time. Marcus will waive any interest incurred during the deferral and extend your loan by one month (you will pay interest during this extra month). Your payments resume as usual after your deferral. Advance notice is required. See loan agreement for details.
|5.99% - 24.99% APR||$5,000 up to $35,000||Get Rates|
|6.95% - 35.99% APR||$2,000 up to $40,000||Get Rates|
|5.99% - 21.11% APR||$5,000 to $100,000||Get Rates|
|7.99% - 35.97% APR||$1,000 up to $50,000||Get Rates|
|6.14% - 35.99% APR4||$1,000 to $50,0005||Get Rates|
4The full range of available rates varies by state. The average 3-year loan offered across all lenders using the Upstart platform will have an APR of 20% and 36 monthly payments of $35 per $1,000 borrowed. There is no down payment and no prepayment penalty. Average APR is calculated based on 3-year rates offered in the last 1 month. Your APR will be determined based on your credit, income, and certain other information provided in your loan application. Not all applicants will be approved.
5Your loan amount will be determined based on your credit, income, and certain other information provided in your loan application. Not all applicants will qualify for the full amount. Loans are not available in West Virginia or Iowa.The minimum loan amount in MA is $7,000. The minimum loan amount in OH is $6,000. The minimum loan amount in NM is $5,100. The minimum loan amount in GA is $3,100.
6If you accept your loan by 5pm EST (not including weekends or holidays), you will receive your funds the next business day. Loans used to fund education related expenses are subject to a 3 business day wait period between loan acceptance and funding in accordance with federal law.
For many borrowers, the upper limit for a personal loan will hinge on DTI. A DTI of 36% is considered healthy by mortgage lenders and most won’t go higher than 45% or 50%.
Let’s say your monthly income is $6,000 a month, and $2,500 is already going toward your mortgage, car payment, and other recurring expenses. You could take on another $500 in monthly obligations before your DTI hit 50%.
4 questions to help determine which is best for you
To determine which loan is the right choice for your financial situation, it’s helpful to nail down the answers to a few basic questions. You probably already know the answers to most of these questions, too. Here’s how to use that information.
How much do you want to borrow?
You might be able to borrow a large amount of money using either a home equity loan or a personal loan. But if you’re planning to take out a large loan, you’ll also want to consider which type of loan provides the most favorable repayment terms.
Personal loans tend to have larger monthly payments than home equity loans of equal balances because they have a shorter loan term — 3 to 7 years, rather than five to 30 years for second mortgages.
If you wanted to take out a $50,000 personal loan at 9% interest and pay it back over 5 years, your monthly payment would be about $1,040. On a home equity loan at the same interest rate but with payments spread out over 10 years, the monthly payments would be closer to $595.
So if you need to borrow a large lump sum of money, a home equity loan might be a better solution if you’re “house rich” but “cash poor.” Just remember that spreading out payments over a longer period of time can increase your total cost since you’ll pay more in interest over the life of your loan.
On the other hand, even if you don’t have much equity in your home, you might be able to take out a sizeable personal loan if your mortgage payments and other bills aren’t a strain on your finances.
What do you need the money for?
Whether a home equity or personal loan makes more sense can also depend on what you intend to do with the money.
If you need a loan to make home improvements, a home equity loan can have an important advantage over a personal loan. The interest payments on a cash-out refinance or home equity loan are tax deductible, as long as you use the loan to make “substantial improvements” to your home. For loans made after Dec. 15, 2017, the mortgage interest deduction can only be claimed for the first $750,000 you borrow.
If you’re not making improvements to your home, or if you’re only borrowing a relatively small amount, a personal loan can sometimes be a better choice. Some HELOCs have a minimum initial draw, such as $10,000. If you’re borrowing to take a trip or pay off an unexpected medical bill, you might be reluctant to put your home up as collateral for a loan.
How fast do you need the money?
If you need money right away, it’s hard to beat a personal loan. Some online lenders can review, approve and fund a loan within 24 hours. Although it might take several days to get a larger, more complex personal loan, the process will almost always be faster than a home equity loan.
Home equity loans can take weeks to close, particularly if there are requests for additional documentation such as an appraisal. On the other hand, rates on some types of home equity loans can be better than personal loans, making the longer wait worthwhile.
What interest rate can you qualify for?
If you have good or excellent credit, using your house as collateral might get you a significantly lower interest rate on a home equity loan than you’d qualify for with a personal loan. But your interest rate can depend on the type of loan you’re seeking as well as the repayment term. The shorter the repayment term, the lower the interest rate offered by most lenders.
- Home equity loans: Interest rates on traditional home equity loans can be a couple of percentage points higher than what you’re probably used to seeing advertised for purchase mortgages or mortgage refinancing. That’s because a second mortgage is riskier for the lender.
- Personal loans: For borrowers with a good credit report, rates on personal loans can be surprisingly competitive — particularly if you’re able to take out a loan with a shorter repayment term.
If you qualify for low rates, both personal loans and home equity loans can be an affordable source of funding for paying off high-interest credit card debt. You can use Credible to request actual rates from multiple lenders offering personal loans and cash-out mortgage refinancing.
About Rates and Terms: Rates for personal loans provided by lenders on the Credible platform range between 3.99% - 35.99% APR with terms from 24 to 84 months. Rates presented include lender discounts for enrolling in autopay and loyalty programs, where applicable. Actual rates may be different from the rates advertised and/or shown and will be based on the lender’s eligibility criteria, which include factors such as credit score, loan amount, loan term, credit usage and history, and vary based on loan purpose. The lowest rates available typically require excellent credit, and for some lenders, may be reserved for specific loan purposes and/or shorter loan terms. The origination fee charged by the lenders on our platform ranges from 0% to 8%. Each lender has their own qualification criteria with respect to their autopay and loyalty discounts (e.g., some lenders require the borrower to elect autopay prior to loan funding in order to qualify for the autopay discount). All rates are determined by the lender and must be agreed upon between the borrower and the borrower’s chosen lender. For a loan of $10,000 with a three year repayment period, an interest rate of 7.99%, a $350 origination fee and an APR of 11.51%, the borrower will receive $9,650 at the time of loan funding and will make 36 monthly payments of $313.32. Assuming all on-time payments, and full performance of all terms and conditions of the loan contract and any discount programs enrolled in included in the APR/interest rate throughout the life of the loan, the borrower will pay a total of $11,279.43. As of March 12, 2019, none of the lenders on our platform require a down payment nor do they charge any prepayment penalties.