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If you need to borrow money, a home equity loan or personal loan could be a good option. However, one might be better suited to your situation than the other.
Here’s how to decide between a home equity loan vs. personal loan:
- Home equity loan vs. personal loan
- How do home equity loans work?
- How do personal loans work?
- When does a home equity loan make sense?
- When does a personal loan make sense?
- Alternatives
- Is a home equity loan or personal loan right for you?
Home equity loan vs. personal loan
Here are the main factors to consider when deciding between a home equity loan vs. personal loan:
| Home equity loans | Personal loans | |
| Interest rates | Varies (typically lower than personal loans) | Varies (typically higher than home equity loans) |
| Loan terms | 5 to 30 years | Typically 1 to 7 years (depending on the lender) |
| Loan limits | Generally limited to 85% of your home’s equity (some lenders might have stricter limits) | $600 to $100,000 (with Credible partner lenders) |
| Basic eligibility |
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| Time to fund | Can be a few weeks (depending on complexity of the loan) | 1 to 7 business days (depending on the lender) |
How do home equity loans work?
A home equity loan is a type of loan secured by your home’s equity — the percentage of your home’s value that you own compared to how much you still owe on your mortgage.
Because there’s less risk to the lender, home equity loans tend to have lower interest rates than personal loans.
The amount you can borrow with a home equity loan depends on how much equity you have in your home.
You’ll need to have at least 15% to 20% equity in your home to qualify. You’ll also generally need good credit and a debt-to-income (DTI) ratio below 43%.
For example, if your home is worth $300,000 and your mortgage balance is $200,000, your home’s equity is $100,000.
Because a home equity loan is technically a second mortgage, it can take a few weeks to process. If you’re approved, you’ll receive the money as a lump sum that you can use as you wish.
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Pros and cons of home equity loans
If you’re considering a home equity loan, here are a few points to think about first:
Pros
- Typically lower interest rates than personal loans
- Might be able to borrow a larger amount (depending on the equity in your home)
- Fixed monthly payments
- You’re using the loan for substantial home improvements, meaning your interest payments are tax-deductible through the mortgage interest deduction
Cons
- Longer underwriting process (might be a few weeks)
- Might come with additional closing costs and fees
- Could take longer to pay off your home
- Might lose your home if you default on the loan
Check Out: Home Equity Loans vs. Line of Credit
How do personal loans work?
Personal loans are generally unsecured loans — while you won’t have to worry about collateral, you’ll likely have to pay a higher interest rate compared to a home equity loan.
You’ll generally need good credit and verifiable income to qualify, though individual lenders will each have their own requirements.
Like a home equity loan, a personal loan is paid out in a lump sum that you’ll pay back in fixed installments over time. You’ll generally have one to seven years to repay the loan, depending on the lender.
Learn More: Secured Personal Loans
Pros and cons of personal loans
If you’re considering a personal loan, here are some advantages and drawbacks to consider:
Pros
- Faster time to fund (typically one to seven business days, depending on the lender)
- Less risk to your assets if you default
- Could be an option if you are not a homeowner or don’t have much equity in your home
Cons
- Generally have higher interest rates than home equity loans
- Could be hard to qualify if you have poor or fair credit
- Might not be able to borrow as much for very large projects (like home additions)
If you decide to take out a personal loan, it’s a good idea to consider how much the loan will cost you over time. You can estimate how much you’ll pay for a loan using our personal loan calculator below.
Enter your loan information to calculate how much you could pay
With a $ loan, you will pay $ monthly and a total of $ in interest over the life of your loan. You will pay a total of $ over the life of the loan.
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When does a home equity loan make sense?
Here are a few situations where a home equity loan might be a good choice:
- You have more than 15% equity in your home.
- You need a longer time to repay the loan.
- You want a lower interest rate.
- You don’t need the money right away.
When does a personal loan make sense?
There might also be times where a personal loan could be a better option for you, such as if:
- You’re looking for a short-term loan.
- You need to borrow only a small amount of money.
- You need the funds as soon as possible.
- You don’t own a home or don’t want to risk losing your home if you can’t make your payments.
If you decide to take out a personal loan, be sure to consider as many lenders as possible to find the right loan for you. Credible makes this easy — you can compare your prequalified rates from multiple lenders in two minutes.
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Alternatives
If a home equity loan or personal loan doesn’t seem right for your needs, here are a few alternatives to consider:
- Home equity line of credit (HELOC): A HELOC is another way to tap into your home’s equity. However, unlike a home equity loan, a HELOC is a type of revolving credit — meaning you can repeatedly draw on and repay your credit line. This could be a good choice if you’re financing ongoing projects or don’t need all of the money right away. Just keep in mind that your home could be at risk if you can’t make your payments.
- Credit card: This is another type of revolving credit — however, unlike a HELOC, credit cards are typically unsecured. Some cards also come with 0% APR introductory periods, meaning you won’t have to pay any interest if you can repay your balance by the time this period ends. However, if you can’t pay off the card in time, you might be stuck with some hefty interest charges.
- Cash-out refinancing: This is a way to refinance your mortgage for more than you currently owe — you’ll get the difference as cash, minus any closing costs. Like a home equity loan, cash-out refinancing uses your home as collateral — meaning you could lose it if you can’t afford your payments.
Learn More: Cash-Out Refinancing vs. Home Equity Loan
Is a home equity loan or personal loan right for you?
A home equity loan or personal loan could be a good option for getting the cash you need. However, the right choice between the two will ultimately depend on your situation and needs.
For example, if you’re looking for a lower interest rate and have equity in your home, a home equity loan could be the right choice for you.
But if you need the funds right away and would rather not risk your home, a personal loan might better suit your needs.
If you decide to take out a personal loan, remember to consider as many lenders as you can to find the right loan for you. This is easy with Credible — you can compare your prequalified rates from multiple lenders in two minutes after filling out a single form.
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