At a Glance

Buying a house is a big decision. You spend time deciding what you want in a home, searching the realtor sites, visiting homes for sale, and deliberating about what’s best. Another huge part of buying a home is the financial part – how are you going to pay for it?

There are multiple types of loans available, but the two you may consider for a home are a personal loan or a home loan. How do you know which is best?

Read on to learn more.

What are personal loans?

With borrowing amounts from $1,000 to $100,000 terms typically ranging between 12 and 84 months, personal loans can be an excellent option for anyone who needs extra funds. Personal loan funds can be used for just about anything, including debt consolidation, home renovations, car repairs, weddings, vacations, medical bills, and more.

Typically unsecured, meaning they aren’t backed by collateral, and fixed, meaning the interest rate and monthly payment does not change over time, you can get a personal loan from a bank, credit union, or online lender. Loan terms and rates vary based on the lender, loan details, and borrower credit, income, and other factors.

Learn more: What is a personal loan?

How do personal loans work?

When you apply for a personal loan, the lender decides if they will approve your application based on the information you provide, your credit score, and your credit history. Accepting the loan terms, you agree you’ll repay the loan over a certain period, or term, plus interest. These installments are fixed payments made each month.

The loan funds, which are deposited in one lump sum, can then be used for whatever you need.

There are different types of personal loans, including:

  • Secured
  • Unsecured
  • Fixed rate
  • Variable rate

Most lenders allow you to get prequalified before applying, which doesn’t affect your credit score but can give you a better idea of the loan and interest rate you’d qualify for, allowing you to better compare your options. When you find the right loan for you, you’ll apply, accept the loan, sign the loan documents, and then get the funds.

Learn more: How do personal loans work?

Pros and cons of personal loans

Pros Cons
  • Funds can be used for just about anything.
  • Borrowers with poor credit may incur high interest rates.
  • High borrowing limits.
  • Fees and penalties, including origination fees, application fees, late payment penalties, and early payoff penalties.
  • Competitive interest rates, especially for well-qualified borrowers.
  • It is a type of debt.
  • Most are unsecure, so there is no collateral required to secure the loan.
  • You can decrease your credit score if you make late or miss payments.
  • Can be used for debt consolidation, helping you pay off debt faster and save money.
  • May require collateral or a cosigner if you have poor credit.
  • Can help build credit.
  • Monthly payments can be high.
  • Fast and easy application, approval, and funding processes.

Learn more: The pros and cons of personal loans

Interest rates on personal loans

Interest rates on personal loans can depend on factors such as the borrower’s:

  • Credit history
  • Credits score
  • Income
  • Debt-to-income ratio

It also depends on the lender, the loan details (like amount and term), interest rate type, and more. Generally, those with excellent credit will find lower interest rates, while borrowers with poor credit will likely have a much higher rate. Here are average rates based on credit score:

Credit Score Average Loan Interest Rate*
720 – 850 10.73% – 12.5%
690 – 719 13.5% – 15.5%
630 – 689 17.8% – 19.9%
300 – 629 28.5% – 32%

*As of January 12, 2023

Note that these are just averages, so you may get lower or higher interest rates depending on your qualifications.

What are home loans?

A home loan, also known as a mortgage, is a sum of money that’s loaned to a borrower to purchase a house, apartment, condo, or other livable property. You make this agreement with your lender, such as a bank, credit union, or private lender, and agree to repay the loan over a set period. Payments could be monthly or biweekly, and you’ll be required to also pay interest.

There are two primary types of home loans:

  • Fixed-rate mortgage: The most popular type of home loan, it requires the borrower to repay the loan over a set period with a fixed interest rate. This means the rate does not change over time. While this can be more expensive, you’ll have lower rates if you pay off the mortgage faster. These loans are suitable for those who plan on staying at their property long-term or prefer a predictable and fixed budget.
  • Adjustable-rate mortgage (ARM): The interest rate for this type of home loan is variable, meaning it can increase or decrease over the loan’s term. This is riskier because while you may get a lower rate, you also chance a much higher rate, though most lenders offer lower rates for the first year. It’s also difficult to predict and much tougher to budget for. An ARM is better for those planning to only stay in their home for a short period.

How do home loans work?

If you’re buying a home or property, you’ll likely need to take out a mortgage. Each month you’ll make a mortgage payment that gets split into four areas:

  1. Principal, which is the part of your loan balance that’s paid down with each payment.
  2. Interest, which is the rate charged by your lender.
  3. Taxes, so you’ll pay 1/12 of your yearly property tax bill each month based on how much is assessed each year in your neighborhood.
  4. Homeowners insurance, provides financial protection for a person’s home and personal property in case of damage, theft, or other covered losses. It typically includes liability coverage, which protects the homeowner in case someone is injured on their property, as well as coverage for the cost of rebuilding or repairing the home in the event of damage or destruction.

When you first start paying off your home loan, most of your payment will go toward your interest. Eventually, you’ll start paying more principal until the loan is completely paid off.

Note that home loans are secured, and your house or property is used as collateral. This means that if you can’t make your payments, the lender can take possession of your home.

Additionally, if you want to sell your house before the loan is repaid in full, you’ll likely have to pay off the loan completely before receiving any profit from the sale.

Pros and cons of home loans

Pros Cons
  • Makes it possible to purchase a house.
  • A longer loan term means you pay more interest over time.
  • Longer terms mean lower monthly payments.
  • Secured and your home is used as collateral.
  • Lower interest rates.
  • Large amount of debt to take on.
  • May get tax breaks on interest payments.
  • Fees.
  • Considered “good” debt.
  • Interest rates can increase over time.
  • Can help you maintain or increase your credit score.

Interest rates on home loans

As of January 12, 2023, the average rate for the benchmark 30-year fixed mortgage is 6.46%. However, shopping around and comparing multiple lenders can help you find the lowest rate possible for you. Rates can be determined by factors such as:

  • Your credit score.
  • Your down payment.
  • The location of the property.
  • The loan amount and closing costs.
  • The type of loan.
  • The loan’s term.
  • The type of interest rate.

As with other types of loans, the higher your credit score, the lower rate you’ll qualify for.

Personal loan vs. home loan

While you technically can use a personal loan to purchase a house, it’s not usually as good an option as a home loan and it’s not typically recommended. In most situations, a home loan is the best option for those looking to buy a house or property.

One time you may consider a personal loan over a home loan is if you plan on buying an unmortgageable home. When you apply for a home loan, the lender wants to know if it can easily sell your home should it have to foreclose. If not, you may not get approved. This may be the case for properties such as:

  • Tiny homes
  • Abstract or abnormal constructions
  • Homes that are in advanced states of disrepair
  • Inaccessible homes

The personal loan is not tied to an asset, so you can use it to purchase one of these properties. You also don’t need a down payment for a personal loan, which you will for a mortgage. Plus, if you default on the loan, the lender won’t be able to seize your house.

Keep in mind that the loan amount for personal loans is usually lower than what’s available with a mortgage, and loan terms can be much shorter (usually capping at 10 years) vs. a mortgage (15 or 30 years).

If you want to buy a house, going with a home loan that has a longer term, larger sum, and lower interest rate is likely the best option.

Note, though, that you can use a personal loan for other expenses such as:

  • Moving
  • Home renovations
  • Home additions


There are a lot of factors that go into the cost of a loan, including the interest rate, fees, loan amount, loan term, and lender. Oftentimes, a home loan would have a lower initial interest rate, but the amount is bigger, and terms are longer, so you’ll pay more in interest over time. A personal loan may have a higher interest rate, but if you have a lower amount and/or a shorter term, you’ll pay less.

While you technically can use a personal loan to buy property, it’s better to go with a home loan in most cases. Home loans have lower interest rates, longer terms, and higher loan amounts to cover your purchase. However, if you’re planning on buying a very small or mobile home, or property at a lower cost, a personal loan can be a good option.

No, a personal loan cannot be transferred or merged into a home loan.

This depends on your credit, the type of, size, and cost of the home you’re buying, and your financial situation. A personal loan could be used for smaller or cheaper properties, and you’d owe less interest. Still, a mortgage is a better route for a more standard home or property due to its more significant amounts, longer timelines, and lower interest rates.