Home equity loans and personal loans are both installment loans that offer upfront lump sum payments, and each can be used for various financial needs. However, they have some key differences. The option that’s best for you depends on your needs and unique financial situation.
The primary difference between home equity loans and personal loans is in their collateral requirements. A home equity loan allows you to borrow money using your home’s equity as collateral, making it a secured loan. Because of this, there can be a significant risk if you’re unable to make loan payments. If you default on your loan, the bank can foreclose on your house.
Personal loans are generally unsecured loans, although secured personal loans also exist. Instead of requiring collateral, personal loan applications are approved based on your credit and other financial information as required by the lender’s underwriting guidelines.
These loan types also differ when it comes to loan amounts and repayment terms. Home equity loans allow you to borrow up to 80% of the equity you have in your home, meaning you can borrow a significant amount of money. Most personal loans only go up to $50,000, though you can find lenders that offer as much as $100,000. And while home equity loans can have repayment terms up to 30 years, personal loan terms typically max out at seven years.
One area where home equity loans and personal loans are similar is their interest rates. Both typically have fixed rates. A fixed-rate doesn’t change for the entirety of the loan term, unlike variable rates, which can fluctuate during the repayment period.
You can use home equity loans and personal loans to pay for almost anything. Some common uses for both loan options are:
A home equity loan could make sense if:
As beneficial as a home equity loan can be, it may not be the right choice if:
There are benefits and downsides to home equity loans, including:
A personal loan could be a good option if:
Personal loans also have pros and cons to consider, such as:
Home equity loans and personal loans offer many benefits for borrowers but may not be a good fit for everyone. Here are some alternative financing options to consider: