Personal Loan vs. Home Equity Loan: Which Is Best?
The best loan depends on factors such as your credit, how much home equity you have and your reason for borrowing.
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Head of Content, Personal & Student Loans Nerdy takeaways
- Home equity loans and personal loans are both fixed-rate, lump-sum financing options.
- Personal loans are unsecured and your rate is tied to your credit and income.
- Home equity loans usually have lower rates, but your home is collateral for the loan.
- Personal loans may be better for debt consolidation; home equity loans have tax benefits for home improvements.
Personal loans and home equity loans are both fixed-rate financing options that you get in a lump sum and repay in equal monthly installments over a predetermined repayment period.
The main difference between personal and home equity loans is that personal loans are unsecured, meaning there’s no collateral, while home equity loans are secured by your home.
The two financing options also have different borrowing amounts, rates and qualification requirements.
| Personal loans | Home equity loans | |
|---|---|---|
| Loan amount | $1,000 to $100,000. | Up to 80% of your home's value minus your outstanding mortgage. |
| Rates | 7.5% to 36%. | Rates are tied to the prime rate, with most rates starting in the single digits. |
| Repayment terms | 2 to 7 years. | Up to 30 years. |
| Secured or unsecured | Typically unsecured. | Secured by your home. |
| Credit score requirements | Minimum 560; higher scores are more likely to qualify. | Minimum 620. |
When a personal loan is best
Little equity: Personal loans can work for homeowners who don’t want to use equity but have enough cash flow to make monthly loan payments.
Emergency expenses: With quick loan decisions and funding that takes a few days rather than weeks, personal loans can be a good fit for emergency expenses.
Good credit: Strong credit and income are key to qualifying and getting a low rate, so a personal loan will be more expensive if you have bad credit.
» MORE: Best home improvement loans
Personal loan pros and cons
Personal loan pros
- No equity or collateral: New homeowners and those with little equity may be eligible for a personal loan because lenders don’t consider equity on an application.
- Fast funding: Most lenders send funds to approved borrowers within a week of approval — some can fund a personal loan the same or the next day.
- Pre-qualification: Many lenders let borrowers pre-qualify to preview their loan amount, rate and repayment term with a soft credit pull.
Personal loan cons
- Rates may be high: Personal loan annual percentage rates are from 7.5% to 36%, and those who qualify with fair or poor credit (scores below 690) will likely get a rate on the high end of that range.
- Monthly payments may be high: High rates and short repayment terms can make monthly payments higher on personal loans than home equity loans.
HELOC & Home Equity Loans from our partners
on Figure
Figure
Min. credit score
640
Max. loan amount
$400,000
on New American Funding
New American Funding
Min. credit score
580
Max. loan amount
$750,000
on Upstart Mortgage LLC
Upstart Mortgage LLC
Min. credit score
600
Max. loan amount
$250,000
When a home equity loan is best
Home equity loans have lower rates and long repayment terms, keeping monthly payments low. Your home’s value is considered on a home equity loan application, meaning your credit score doesn’t weigh as heavily as it does with a personal loan.
The big question is whether you’re comfortable using your home as collateral. Because a home equity loan is a second mortgage, failure to repay gives the lender the right to take your house. If that thought bothers you, this may not be the financing option for you.
» MORE: Best home equity loans
Home equity loan pros and cons
Home equity loan pros
- Low rates: The collateral on a home equity loan keeps rates low.
- Fair-credit borrowers may qualify: Stellar credit isn’t required to get a home equity loan, and borrowers with fair credit scores may get a lower home equity loan rate than on a personal loan.
- Interest may be tax-deductible: Interest is tax-deductible if you use the funds for a home improvement project.
Home equity loan cons
- Approval could take weeks: A home equity loan can take two to six weeks from application to funding.
- Your home is at risk: If you can’t repay the loan, your house will be in jeopardy.
- Not ideal if you plan to sell: If you sell your home before the loan is repaid, the balance will be paid from the sale proceeds.
Reasons to get a personal loan vs. home equity loan
The reason you’re borrowing is another factor to consider when choosing between personal and home equity loans. In most cases, comparing different financing options gives you a chance to find the lowest rate.
Here’s how personal and home equity loans work for different expenses.
Large home improvement projects: Low monthly payments on home equity loans make them a common financing option for home renovations like kitchen remodels and deck additions. It doesn’t hurt to check your personal loan rate to see which option is more affordable, but you can’t deduct interest on a personal loan like you can with an equity financing option.
Emergencies and minor repairs: A personal loan will be approved and funded faster in an emergency than a home equity loan. But don’t discount affordability. If the roof is leaking but not ready to blow, take the time to compare home equity loans, personal loans and other financing options (more on those below).
» MORE: Best emergency loans
Debt consolidation: Personal loans are commonly used for debt consolidation because they can have lower rates than credit cards, and they don’t require collateral. If you don’t qualify for a low-rate personal loan, consider other debt-payoff options before tapping equity.
Other financing options
Here are other financing options to consider.
Home equity lines of credit: Consider a HELOC if you have enough equity but are still determining how much money you need to borrow. With this type of financing, you borrow a certain amount but repay only what you use.
» MORE: Compare HELOC lenders
Credit cards: A 0% interest credit card can help you consolidate debts or cover a small DIY home improvement project, but be mindful of your credit limit and utilization. Unlike personal and home equity loans, you can make interest-free purchases on a credit card — if you pay the balance before interest has a chance to accrue.
» MORE: Compare credit cards
Cash-out refinance: A cash-out refinance makes sense when current mortgage rates are lower than what you’re paying. You refinance your mortgage for a higher amount than you owe and then “cash out” the rest. A cash-out refinance often comes with closing costs and requires an appraisal, so your timeline and budget should be pretty concrete before you choose this option.
Mix and match: You can split an expense up between multiple types of financing. For example, you could pay for the bulk of a home improvement project with a personal loan, but use your credit card or savings to cover any unexpected costs. Just keep an eye on how much debt you take on overall.
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HELOC & Home Equity Loans from our partners
on Figure
Figure
Min. credit score
640
Max. loan amount
$400,000
on New American Funding
New American Funding
Min. credit score
580
Max. loan amount
$750,000
on Upstart Mortgage LLC
Upstart Mortgage LLC
Min. credit score
600
Max. loan amount
$250,000
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