Personal Loan vs. Home Equity Loan

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Personal Loan vs. Home Equity Loan- Home equity loans and personal loans can be used for a variety of purposes, including paying medical bills, consolidating debt, financing home improvements, and more. In general, they are both fixed-finance options that you can get at once. And pay back in equal installments monthly over a set period of time. When it comes to affordability, versatility, and available loan products, it is hard to compete with home equity loans and personal loans.  But which is the best one to go for?

Personal Loan vs. Home Equity Loan

That answer is based on a number of variables, many of which depend on your specific financial situation. In this article, we will break down the main benefits and drawbacks of both loan types. So that you can get a better view of which one is best for you.

What is a Personal Loan?

Personal loans are unsecured loans that do not require borrowers to have collateral (something that is valuable that lenders can repossess if you fail to pay it back). You can make use of a personal loan for various expenses, such as wedding expenses, debt consolidation, medical expenses, financing huge purchases like a car or boat, and home improvement.

These loan repayment terms range between one and seven years, depending on the lending company. Generally, the longer the term, the higher the interest rate will be. Most have fixed loans between 4% and 36%. Limits range from $500 to $50,000, but some lenders lend up to $100,000. Keep in mind that the amount you borrow and your interest rate depend on your income, credit score, and other outstanding debts.

How Does it Work?

Once you ask for a personal loan, it can take anywhere from a few minutes to a week for the lender to decide. They usually want a credit score of at least 660, and they may also check your income.

If they approve your loan, they’ll put the money into your bank account in one go, usually within a few days. You can start paying back the loan right after you get the money, and you pay interest on the whole amount, whether you use it all or not. Some lenders might also request extra fees, like for starting the loan or paying it off early, but this changes depending on who you borrow from.

When can I choose a Personal Loan?

You can go for this option if you only want to borrow a few thousand dollars and need a very easy loan application process. Additionally, borrowers with good to excellent credit may be eligible for lower interest rates. However, home equity loans require equity in your home, so if you don’t have equity, you won’t qualify for this type of loan. This makes a personal loan the best choice for you. However, keep in mind that it may not be the right choice for you if you need to borrow a huge amount of money that exceeds the loan limit of the lender.

Home Equity Loan and how it Works?

Home equity loans are secured loans and are bigger than personal loans because they’re based on your home’s equity—what your home is worth minus what you still owe on it. Most lenders will let you borrow up to 85% of your home’s total value.

One big plus of a home equity loan is lower interest rates compared to personal loans. But remember, if you can’t pay back the loan, the lender can take you home.

Getting a home equity loan is much more complicated than a personal loan. Even though you can apply online, it takes a few weeks because they need to check out your property. You can check with your mortgage lender and compare other home equity loans to see how much you can borrow and what the terms are.

When to Choose a Home Equity Loan

If you do get a low interest rate on a personal loan and you have enough equity in your home, then a home equity loan is the best choice for you. The reason is that home equity loans make use of your home as collateral. And the interest rates are lower than those of personal loans. If you make use of the proceeds for a remodeling project or home repair, you can reduce any interest paid on the loan on your taxes. This is not an option with the personal loans.

Personal Loan vs. Home Equity Loan: Pros and Cons

Now that we know how both of the loans work, let’s talk about their advantages and disadvantages. With their pros and cons, you can decide which is the best option for you:

Personal Loan Pros

  • Unlike a home equity loan, approval takes just a few minutes.
  • If you default, there won’t be any risk of having your property repossessed by the bank.


  • Interest rates may be very high, depending on your credit score and the amount you want to borrow.
  • Some lenders request repayment penalties if you pay back the loan ahead of time.
  • Unlike home equity loans, repayment terms are shorter. This means monthly payments may be very high.

Home Equity Loan Pros

  • Unlike personal loans, the interest rates are very low.
  • Compared to personal loans, the repayment terms may be longer.
  • You can reduce the interest you pay if you make use of the proceeds to improve the home.


  • Closing costs are always very high.
  • Borrowers who fail to make payments may have their home repossessed by the lender.
  • It can take weeks to get the loan, similar to closing on a home.
  • Some lenders have high loan amounts, which may be higher than what you need.

Just like I have mentioned above, the best loan option for you depends on your specific financial situation. If you need cash, you can also go for other options apart from home equity or a personal loan. These other options include credit cards, home equity lines of credit, 401(k) loans, and cash refinance.