At a Glance

Personal loans and home equity loans are both great options for borrowing money. With a personal loan, you can borrow a fixed amount of money you will have to pay back over a set period. Home equity loans are a bit different – they allow you to borrow against the equity you have in your home. This means you can borrow a more significant amount of money and have a more extended repayment period.

Personal and home equity loans have pros and cons, so it’s essential to do your research before deciding which option is right for you.

In this article, you’ll learn:

What are personal loans?

A personal loan is a type of debt financing that allows you to borrow money for various personal expenses, such as home improvements, medical bills, or education expenses. Unlike a home equity loan or line of credit that are typically secured by your home and may require additional collateral, personal loans are typically unsecured, meaning they don’t need any collateral or personal assets to be used as security.

Learn more: What is a personal loan?

How do personal loans work?

Personal loans provide a lump sum of money you can use for whatever purpose. Repayment terms vary depending on the lender, but personal loans are typically repaid over several years in fixed monthly payments that include both interest and principal. Some lenders offer personal loans with no origination fees or prepayment penalties, which can help you save money over the life of the loan.

Learn more: How do personal loans work?

Pros and cons of personal loans

There are benefits and drawbacks to taking out a personal loan.

Pros Cons
Access to affordable financing that can be used for various personal expenses May be required to pay a higher interest rate than you would for a secured loan like home equity loan or line of credit
Typically have lower interest rates than credit cards or consumer debt Missed or late payments can have serious consequences, such as negative marks on your credit score or late fees.
Lenders allow you to choose your repayment schedule to manage your monthly budget better

Learn more: The pros and cons of personal loans

Interest rates on personal loans

Interest rates on personal loans vary depending on many factors, such as your credit score, the amount you wish to borrow, and the lender you choose. Generally speaking, personal loans with lower interest rates are easier to qualify for than those with higher interest rates. However, shopping around and comparing rates from multiple lenders is essential to find the best personal loan for your needs.

Related: APR vs. Interest rate

What are home equity loans?

A home equity loan is a secured personal loan that uses your home as collateral. Unlike a personal loan, which is unsecured and doesn’t require any personal assets to be used as security, a home equity loan allows you to borrow money by leveraging the value of your home. This can make it easier to qualify for favorable interest rates and repayment terms, though it also comes with certain risks, such as losing your home if you fail to repay the loan.

How do home equity loans work?

A home equity loan provides you with a lump sum of money you can use for whatever purpose. Repayment terms vary depending on the lender, but home equity loans are typically repaid over several years in fixed monthly payments that include both interest and principal. Like personal loans, some lenders also offer no origination fees or prepayment penalties, which can help you save money over the life of the loan.

Learn more: How does a home equity loan work?

Pros and cons of home equity loans

Just like personal loans, there are benefits and drawbacks to taking out a home equity loan.

Pros Cons
Access to affordable financing that can be used for various personal expenses Defaulting on your loan can put your personal assets at risk
Typically have lower interest rates than credit cards or consumer debt Missed or late payments can have serious consequences, such as negative marks on your credit score or late fees.
Lenders allow you to choose your repayment schedule to manage your monthly budget better

Learn more: Pros and cons of home equity loans

Interest rates on home equity loans

As with personal loans, interest rates on home equity loans vary depending on several factors, such as your credit score, the amount you wish to borrow, and the lender you choose. Home equity loans with lower interest rates are easier to qualify for than those with higher interest rates. However, shopping around and comparing rates from multiple lenders is essential to find the best home equity loan for your needs.

Personal loan vs. home equity loan

Choosing between a personal loan and a home equity loan can be a difficult decision. Both personal loans and home equity loans provide you with access to affordable financing, though they each come with their benefits and drawbacks. A personal loan is typically a more flexible option, as it does not require any personal assets to be used as security. However, personal loans usually come with higher interest rates and shorter repayment periods than home equity loans. On the other hand, home equity loans can sometimes offer lower interest rates and longer repayment terms, though they are riskier since your assets secure them. Ultimately, the best option for you will depend on your individual financial needs and preferences.

When should you choose a personal loan?

There are several situations where selecting a personal loan over a home equity loan may make sense. For example, if you need to borrow a relatively small amount of money or if you need to be able to repay the loan quickly, then a personal loan may be a better option than a home equity loan. Also, personal loans can be a good choice if you have poor credit and cannot qualify for lower interest rates on a home equity loan.

Compare: Best personal loans

When should you choose a home equity loan?

There are also some situations where a home equity loan may be the better option. For example, a home equity loan may be your best bet if you need to borrow a large amount of money and have collateral to secure the loan. Additionally, if you want to repay your debt over a more extended period, a home equity loan is better than a personal loan. Ultimately, the best option for your individual financial needs will depend on factors such as the amount you wish to borrow and the length of your repayment period.

Compare: Best home equity loan rates

Alternative borrowing options

If you are looking for other ways to borrow money, there are many other options available. For example, you could consider borrowing from family or friends, applying for a personal loan from an online lender, or using a credit card.

1. Home equity line of credit (HELOC)

A home equity line of credit, or HELOC, is another popular option for borrowing money using the equity in your home. Like a personal or home equity loan, a HELOC allows you to access the funds you need without selling any personal assets. Additionally, with a HELOC, you only pay interest on the amount you borrow, making it a flexible option for many borrowers. However, a HELOC can be risky if you are not disciplined with your spending, as you may end up borrowing more than you need to avoid paying any fees. So ultimately, whether a HELOC is right for you will depend on your financial situation and goals.

Learn more: How does a HELOC work?

2. Credit cards

Another option for borrowing money is to use a credit card. Credit cards are a popular choice, as they offer flexible repayment terms and often come with low interest rates. However, using a credit card can also be risky if you do not have the discipline to manage your spending or make regular repayments on time. Therefore, it is essential to carefully consider your financial situation before deciding whether a credit card is suitable for you.

3. Home improvement loans

If you are looking to borrow money for home improvement projects, there are several lending options available. For example, consider taking out a personal loan, home equity loan, or home equity line of credit. However, it is crucial to carefully consider your personal financial situation and goals before deciding which type of loan is right for you.

Compare: Best home improvement loans

FAQs

No, a home equity loan and HELOC are quite different. A home equity loan is typically a lump sum amount you borrow all at once, while a HELOC is an ongoing line of credit that gives you access to funds as needed. Additionally, with a home equity loan, you will generally have to pay interest on the total amount you borrow. In contrast, with a HELOC, you only pay interest on the funds you use.

Learn more: Home Equity Loans vs. HELOC

Yes, you can take out multiple personal loans or home equity loans to cover the cost of your home improvement project. However, managing numerous debts and making your monthly repayments on time is essential. Additionally, it is typically a good idea to explore all of the borrowing options available to you to find the best deal for your financial situation.

There is no definitive answer to this question, as it will depend on your financial situation and goals. However, some potential uses of a home equity loan that may be considered risky include taking out a large loan that you cannot afford or borrowing more than you need to avoid paying any fees for additional funds. Ultimately, it is essential to carefully consider your financial situation and goals before deciding whether a home equity loan is the best choice for you. With careful consideration, research, and planning, you can make an informed decision that will help support your finances.

This depends on many factors, such as your financial situation and the loan terms. Home equity loans typically have lower interest rates than personal loans, but this is only sometimes the case.