Home equity loan vs. personal loan: what’s the difference? Personal loans and home equity loans are fixed-rate and lump-sum financing options. However, home equity loans have lower rates, and your home will be used as collateral. On the other hand, personal loans are unsecured, and your rates are connected to your income and your credit.
If you are considering applying for a loan and aren’t sure whether to opt for home equity loans or personal loans, this article is for you. In this article, we will provide the differences between these two loans to enable you to decide.
What is a Home Equity Loan?
A home equity loan is also known as a second mortgage. Furthermore, it is a secured lump-sum loan that requires your home as a form of collateral. When you pay back your debt at a fixed interest rate, your monthly payments will remain the same until you finish paying off your loan. Note that borrowers need at least 20% equity in their homes to qualify. If you are not aware, your home’s equity is the value of your home minus the mortgage you owe.
How Does it Work?
Unlike personal loans, home equity loans are larger due to the use of your home’s equity. To determine how much you can borrow, you need to subtract how much you owe from the value of your home. Lenders allow you to access up to 85% of your home’s loan-to-value ratio. One of the advantages of this type of loan is that you can access lower interest rates, unlike a personal loan.
Pros and cons
- Tax-deductible interest.
- Low rates.
- Monthly payments and your interest rate will be fixed during the repayment period.
- Borrowers with fair credit can qualify.
- Longer repayment terms.
- If you plan to sell your home soon, it is not the best option.
- Approval can take weeks to happen.
- Your home is at a large risk.
- A loan-to-value ratio of 85% or higher is required.
- Closure fees range from 2% to 5% of the total loan amount.
When To Get a Home Equity Loan
These are the best times or periods to choose a home equity loan:
- If you do not have a good credit score.
- Making plans to renovate your home.
- Have a lot of equity.
- If you are interested in low rates.
- If you are sure that you can repay the loan.
What is a Personal Loan?
A personal loan is an unsecured loan that allows borrowers to access funds without using their assets as collateral. If you are approved for this loan, you will get it in a lump sum and are required to pay it back in fixed installments from 2 to 5 years. Additionally, the personal loan amount falls between $1,000 and $50,000, but it all depends on the type of lender you are using. However, some lenders can extend the loan amount for outstanding borrowers.
How Does it Work?
If you are looking for a loan for any purpose, then you should consider a personal loan. Some of the common reasons people apply for a personal loan are for financing large purchases, debt consolidation, and vacations and weddings. Furthermore, this type of unsecured loan is usually offered by online lenders, banks, and credit unions. When you borrow, you will pay back this loan over a particular term, which is normally 2 to 5 years. If you are looking for a low rate and have a good or excellent credit score, you will most likely be approved.
Pros and cons
- There is no required collateral.
- Fast approval.
- Fixed monthly payments and interest rates.
- High monthly payments.
- Low funding amounts.
- High rates.
- Short-term lengths.
- Loan fees include origination, prepayment, and late payment charges.
- If you have bad or fair credit, the interest rates may be higher.
When to Get a Personal Loan
These are the best times to get or apply for a personal loan:
- Special event financing.
- Should you wish to refrain from using your house as collateral?
- Excellent credit score.
- If you do not have enough equity.
- Education expenses.
- Seeking smaller expenses.
- If you need money for a quick expense.
- Home improvements.
Home Equity Loan vs. Personal Loan: What’s the Difference?
Here are the differences between a personal loan and a home equity loan:
|Home equity loan
|4% to 8% on average
|6% to 36%
|Credit score requirements
|Minimum of 560
|A minimum of 620
|Up to 80% of your home’s value
|$1,000 to $100,000
|Secured or unsecured
|Secured by your home
|Up to 15 years
|2 to 7 years
Since you now know the clear difference between these types of loans, you will have no trouble choosing or knowing what type of loan to apply for.