Personal Loan vs. Home Equity Loan: Which Is Best for You?

Depending on your financial situation and the purchase you’re planning, a personal loan may be a better way to borrow money than a home equity loan — or vice versa. We’ll cover the differences and similarities between personal loans and home equity loans, plus which spending scenarios are a good fit for each loan type and when to consider another funding alternative altogether.

Brief overviews of each funding option

How personal loans work

A personal loan gives you a lump sum of cash that you pay back in fixed monthly installments with interest, typically over several years. You can use the funds for almost any household expense, from debt consolidation to home improvements, and most lenders don’t require you to offer an asset as collateral for the loan. You can get a personal loan from a bank, credit union, or online lender, and the application process is typically quick — some lenders, like SoFi and LightStream, even offer funding as soon as the same day you apply. 

Available loan amounts depend on the lender and what you can afford, but some lenders offer loans up to $100,000 or more. Repayment terms typically have a maximum of seven years.

How home equity loans work

A home equity loan allows you to borrow against your home’s equity, which is the share of your home you own outright. For instance, if your home is worth $500,000 and you have a mortgage balance of $200,000, you would have $300,000 in home equity. 

Like a personal loan, a home equity loan is disbursed as a lump sum and repaid in monthly installments, typically with a fixed interest rate. Since home equity loans are secured by your home, failing to make payments can result in foreclosure. What’s more, a home equity loan often requires an appraisal and closing costs, which can add to the cost and effort of getting one.

Similarities and differences

Similarities of personal loans and home equity loans

• Funds disbursed as a lump sum: Both personal loans and home equity loans are non-revolving or closed-end loans — you receive the full balance you’re approved for in one lump sum payment.
• Predictable monthly payments: You repay a home equity loan or personal loan according to a predetermined schedule of monthly installments. Most personal loans and home equity loans have fixed interest rates, so the monthly payment stays the same for the life of the loan. 
• Lower APRs than credit cards: Taking out a personal loan or home equity loan is typically cheaper than carrying a balance on one or more credit cards. The average APR (annual percentage rate) for credit cards is over 21%, according to the Federal Reserve, while the average APR for a 2-year personal loan is just over 11%. The average rate for a $30,000 home equity loan is around 8%, according to Bankrate. (APR indicates the annual borrowing cost, including interest and upfront fees, as a percentage of the loan amount.)
• Upfront fees: Home equity loans typically have closing costs ranging from 2% to 5% of the loan amount. Many personal loans also come with an upfront fee known as an origination fee. This fee could be up to 15% of the loan amount if you have fair or bad credit, but it’s often much lower if you have good credit. Some personal loan lenders don’t charge any fees, and some banks offer home equity loans with no closing costs. 

Differences between personal loans and home equity loans

• Funding timeline: Personal loans offer quick funding, sometimes as soon as the same day you apply. Home equity loans typically take longer to fund. While some lenders, like Rocket Mortgage, offer an automated valuation model (AVM) to speed up the process, many still require a traditional appraisal. It can take up to two months to get the funds, depending on the lender and your application.
• Use of funds: Restricted uses vary by lender, but home equity loans are generally more flexible than personal loans. Most personal loan lenders prohibit you from using the loan funds to buy a home or pay for college, while home equity lenders typically allow you to use the funds for these purposes. 
• Repayment terms: Personal loan repayment terms typically range from 2 to 7 years. Some lenders offer longer terms — for example, LightStream offers terms up to 20 years for home improvement loans. Home equity loan repayment terms typically range from 5 to 30 years, so they’re better for borrowers who need longer to repay. 
• Collateral requirement: Home equity loans are secured by your home. Many lenders require you to have at least 20% equity in your home to qualify. And if you miss payments, the lender could seize your home. Personal loans are usually unsecured, so there’s no risk of losing an asset. That said, some lenders, like Best Egg, offer the option of a secured personal loan at a lower rate. 

Impact on credit

How personal loans affect your credit score

A personal loan affects your credit score in several ways, including:

• Initial application: When you formally apply for a personal loan, the lender typically performs a hard credit inquiry, which usually causes your credit score to decline a few points. You can often prequalify, however, to get a rate estimate without impacting your credit. 
• Additional debt: A personal loan adds to your outstanding debt, which accounts for 30% of your FICO score. The more you owe relative to the principal loan amount or your available credit, the greater the impact — so your score is most affected during the initial months of repayment. If you use a personal loan to consolidate credit card debt, however, the reduction in your credit utilization may increase your score. 
• Credit mix: If you’ve only had credit cards in the past and this personal loan is your first installment loan, it will add to your credit mix. That could positively impact your score, though to a lesser extent than other factors. 
• Payment behavior: Your payment history is the most important factor in determining your credit score (accounting for 35%). On-time payments help your score, while missed or late payments damage your credit. 

How home equity loans affect your credit score

Because a home equity loan is another type of installment loan, the impact on your credit score is similar to a personal loan. 

However, it can be easier on your credit to submit multiple home equity loan applications — newer FICO Score models treat all home equity loan applications within 45 days as one inquiry for the purpose of scoring. 

“If your application is approved, it will show up as an installment loan on your credit report,” says Kristina Morales, Chief Finance Contributor at Loanfully. “This can be positive or negative depending on your current credit health,” she says. It may improve your credit mix, but it also increases your amounts owed. And your payment behavior can have either a positive or negative impact, just like a personal loan.

Scenarios when a personal loan makes more sense

• You plan to move soon: If you plan to sell your house, you’ll need to pay off your first mortgage and the home equity loan to transfer the title. Paying upfront fees on a home equity loan doesn’t make sense if you plan to move within a few years — especially if your home loses value. In this case, you could owe more than what your home is worth and need to pay the difference to close.
• You need to borrow less than $10,000: Most lenders require you to borrow at least $10,000 for a home equity loan. If you need a small loan to cover an unexpected expense, like a minor home repair or veterinary bill, a personal loan typically works better. That’s especially true if you can pay off the loan within a few years — home equity loans become most advantageous when you need a large loan with a long repayment term.
• You need the money fast: If you need an emergency loan, a personal loan fits the bill. Some lenders offer same-day or next-day funding, so a personal loan is great for urgent funding needs, like paying your auto mechanic so you can get your car back. The timeline for a home equity loan can be unpredictable, and you could wait weeks to months for the funds. 

Scenarios when a home equity loan makes more sense

• You’re investing in real estate: Most personal loan lenders won’t allow you to use the funds to invest, but you can typically use a home equity loan to make a down payment on a rental property. If you find a great opportunity, the rental income may cover your loan payments. In fact, some mortgage lenders allow you to use projected rental income to qualify for a home loan if your salary is insufficient to meet requirements. Just be aware of the risks — if the investment doesn’t pan out and you can’t afford the payments, you could lose your primary residence.
• You’re facing a large expense: Home equity loans are typically worth the wait and the upfront fees if you have substantial equity in your home and you need to borrow a lot of cash. Whether you’re consolidating credit card debt, remodeling your home, or financing IVF, a home equity loan gives you more wiggle room to pay for a large expense over time, usually at a lower interest rate. 
• You’re hoping to claim a tax deduction: Interest on a home equity loan may be tax-deductible, depending on the tax year and how you use the funds. Through 2025, the interest on home equity loan funds used for certain purposes, like improving your home or buying/building a second residence, may be tax-deductible up to a limit. After 2025, you may be able to deduct home equity loan interest regardless of how you spend the loan funds. 

Alternative funding options to consider

Home equity line of credit (HELOC)

Like a home equity loan, a HELOC is secured by the equity you’ve built in your home. But rather than providing a lump sum all at once, a HELOC allows you to borrow repeatedly up to your credit limit without reapplying. 

“If the borrower doesn’t know how much they will need, a HELOC is a better option because they will only borrow when funds are needed and pay interest only on the balance that is outstanding,” says Morales. Your credit line replenishes as you make payments. 

HELOCs typically have lower closing costs than home equity loans, and some lenders offer a quick close on a HELOC, allowing you to use the credit line within a few days. 

Personal line of credit (PLOC)

A PLOC is similar to a HELOC except that it is typically unsecured. Banks and credit unions offer PLOCs to their account holders, allowing them to borrow against the credit line on an ongoing basis without collateral. PLOCs sometimes come with fees that make borrowing costly, so be sure to evaluate any fees before applying. 

Cash-out refinance

A cash-out refinance replaces your existing mortgage loan with a new and larger home loan, allowing you to keep the difference as cash. A cash-out refinance is most advantageous when you can achieve a lower interest rate on the new mortgage. But Morales says it’s sometimes worth refinancing at a higher rate if the cash allows the borrower to pay off high-interest credit card debt. “While their mortgage interest rate may go up 4% to 5%, after paying off high-interest credit card debt with the cash out refi funds, they may actually be saving each month,” she says.

Credit cards

Credit cards are a great option for small purchases you can repay quickly, as most offer a grace period during which interest doesn’t accrue. Some credit card issuers also offer 0% APR promotions to new cardholders, allowing you to avoid interest for up to two years. But credit cards typically have high APRs outside of zero-interest promotional periods. So if you think you’ll need to carry a balance past the promotional period, a personal loan could save you money.