What’s the Difference Between Home Equity Loans and Personal Loans?
While exact loan terms and requirements can vary from one lender to the next, here are some general differences between home equity loans and personal loans. Personal loans are usually unsecured. This means they don’t require collateral backing. Instead, your signature on the contract is enough to get approved and receive funding. Good credit may be necessary to qualify for a personal loan, especially one with a competitive rate.
Interest Rates
Interest rates for personal loans and home equity loans are often fixed, so you don’t have to worry about rate hikes or payment fluctuations. The exact interest rate you’ll receive on each type of loan will depend on factors such as your credit. However, interest rates on home equity loans may be lower than personal loans because those loans are backed by real estate.
Upfront Fees
Personal loans can have an origination fee that’s a percentage of your loan. Fees vary from lender to lender, and often from loan to loan. One may charge an origination fee up to 4.75% for its loans while another charges up to 8%. A home equity loan isn’t free, either; you may encounter closing costs such as application fees, origination fees, credit-check fees, appraisal fees, and more.
Loan Amounts
Generally, lenders will offer up to 85% of your home equity in a home equity loan. The minimum you can borrow may also be high—at least $35,000, for example. The minimum and maximum you can borrow for a personal loan vary from one lender to the next. You may be able to borrow as little as $1,000, and it’s common for lenders to provide maximum loans of $40,000 or $50,000. However, in some cases, you may be able to borrow up to $100,000.
Repayment Terms
Personal loan terms often range from 24 to 84 months. Home equity loan terms can last from five to 30 years, which could give you a more extended period to pay off the debt.
Tax Perks
If you use a home equity loan to build or improve your home, the interest you pay on the loan may qualify for a tax deduction. Interest you pay on a personal loan for personal expenses is generally not tax-deductible.
Risk
Defaulting on a personal loan can hurt your credit if it’s reported to the credit bureaus. Missing payments on a home equity loan present a greater risk with harsher consequences: Your lender could choose to foreclose on your home because of nonpayment.
Which Is Right For You?
A personal loan will likely be the better option if you don’t own a home or don’t have enough equity to qualify for a home equity loan. It may also be a better option if you need a small loan, since personal-loan lenders may let you borrow a smaller sum. On the other hand, if you own a home, you need a large loan, and you’re confident that you can make monthly loan payments, a home equity loan could be an affordable way to borrow money for a major purchase or debt consolidation. No matter which option you choose, it’s important to shop around, review loan costs, and negotiate with lenders because this can help you find the best offer. A personal loan calculator can help you estimate payments based on the loan terms, interest rate, and amount you borrow.
The Bottom Line
Personal loans and home equity loans are both installment loans but how they work differs in many ways. Home equity loans are backed by your home while unsecured personal loans are not. Home equity loans may come with many different closing costs, while personal loans may have only one origination fee. When deciding between the two options, consider how much you need to borrow, how much equity you have in your home, and how much it’ll cost you. Ultimately, the loan type that aligns with your goals the most while costing you the least is likely the better option.
