We all need access to cash sometimes. Whether it’s to cover an unexpected car repair, make home improvements, or consolidate high-interest credit card debt, the right loan can provide the financial resources you need.
And you’re not alone if you’re looking for help. According to the St. Louis Federal Reserve, there’s $371.15 billion in outstanding home equity lines of credit, as of April 4, 2018. On top of that, TransUnion reported that there’s nearly $107 billion in personal loan balances, as of the second quarter of 2017.
As you consider your funding options, you might consider a home equity loan or personal loan. To understand which is best for you, compare a home equity loan versus a personal loan. Here’s what you need to know.
Home equity loan vs. personal loan: What’s the difference?
The biggest difference between a home equity loan and a personal loan is the fact that you aren’t required to provide collateral for a personal loan. When you get a home equity loan, your property secures the loan. If you can’t pay, the lender can repossess your home to recover the debt.
Personal loans are only limited in size by what the lender is willing to give you. On the other hand, home equity loans are based on how much ownership you’ve built in your home over time.
Additionally, depending on the purpose of your home equity loan, you might be able to deduct some of the interest you pay when you file your taxes. Personal loan interest, meanwhile, is never tax deductible.
|Home equity loan||Personal loan|
|Credit check required||Yes||Yes|
|Maximum loan amount||Depends on available equity||Varies|
|Tax-deductible interest||Yes, in some cases||No|
|Option for revolving credit||Yes||No|
When you get a home equity loan or a personal loan, you’ll receive a lump sum upfront. Afterward, you’ll repay the loan over time with interest. The exception is if you use your home equity to secure a line of credit.
What is a home equity line of credit (HELOC)?
A HELOC is a type of home equity loan. Rather than provide a lump sum to you, the lender provides you with a revolving credit line. It’s similar to a credit card in that you can charge what you want up to a certain limit.
This type of home equity loan can provide an advantage, according to Robert Farrington, a personal finance expert with the financial education website The College Investor.
“Most HELOCs have a draw period and a repayment period. You can typically use your HELOC any time during the draw period, and you only pay interest on what you use,” Farrington said. “With a personal loan or regular home equity loan, you’re getting the entire amount as a lump sum and paying interest on it immediately.”
Farrington pointed out that a HELOC can make a lot of sense if you need more flexibility with a loan or don’t want to borrow a lump sum.
How to decide whether to get a home equity loan vs. a personal loan
Trying to decide what type of loan works best for you is really about your situation, said Casey Fleming, a veteran of the mortgage industry and author of “The Loan Guide.”
“When making this decision, take a step back and ask yourself a few questions,” Fleming said.
Here are some things to consider as you make your choice:
1. How much equity do you have in your home?
“It sounds really obvious, but if you’re renting, the only choice you have is a personal loan,” said Farrington. “But if you only have a small amount of equity in your home, or only want a small loan, it doesn’t make a lot of sense to get a home equity loan.”
For the most part, lenders like to see that you have a loan-to-value (LTV) ratio of 80% or less before they’ll let you borrow, said Fleming.
Your LTV shows a lender how much value is in your home compared to how much you still owe. If your home is worth $200,000 and you still owe $125,000, you have $75,000 in equity and an LTV of 62.5%. With that much built-up value, you would likely qualify for a home equity loan as long as you met the lender’s income and credit requirements.
If you don’t have a decent amount of equity built up, Fleming pointed out, you might not qualify. In that case, a personal loan could be your best choice.
2. How fast do you need the money?
One of the advantages of personal loans is that you can get your money by the next business day. Online personal lenders such as Avant and Upstart can get your money to you quickly. When you’re facing an emergency, a personal loan might provide you with exactly what you need.
With a home equity loan, though, you have to go through a much lengthier process.
“A home equity loan is a second mortgage on your house,” said Fleming. “That means you have to jump through many of the same hoops you did when you first got your mortgage. It’s going to take more than a couple days to get your money.”
3. Do you want to save money on interest?
“Typically, a home equity loan has a lower interest rate because you’re securing it with your home,” said Fleming. “Plus, you might also reduce the cost impact of the loan with a tax deduction.”
How much you save, though, depends on your credit situation. “Home equity loan rates are trending higher right now,” said Farrington. “If you have excellent credit, you might be able to get a slightly lower rate with a personal loan.”
Fleming said that most people with fair to good credit, though, aren’t likely to see the best personal loan rates, and so could save with a home equity loan.
Using our personal loan calculator, you can estimate your interest costs. Consider, for example, your cost of borrowing $15,000 for five years between a home equity loan and personal loan:
Assumptions: The 5.57% interest rate represents the best rate on home equity loans as of April 4, 2018, according to Bankrate. The higher 7.75% home equity loan rate is based on a lower credit score. For personal loans, the best possible rate of 4.99% was based on the lowest advertised rate in our marketplace. The 9.95% rate for a fair credit personal loan is based on Avant’s lowest offered rate.
Be careful if you plan to deduct from your taxes the interest you pay on your home equity loan. Farrington pointed out that the tax law passed at the end of 2017 changed how the interest on home equity loans is treated — at least between 2018 and 2026.
“For the next several years, you can only deduct the interest on a home equity loan if you use it to make home improvements,” said Farrington. “So you won’t see that deduction if you’re using the loan to consolidate your other debt.”
4. What’s the purpose of the loan?
Finally, consider the purpose of your loan. Fleming thinks the best reasons to get a home equity loan or line of credit are to make home improvements or to invest in another property.
“When you take a home improvement loan for those purposes, you’re using equity and reinvesting it into more equity,” said Fleming. “I’ve used home equity loans to remodel my home and also to buy another property. These offer great returns.”
“When you use a home equity loan you’re taking unsecured credit card debt and securing it with your home,” Fleming said. “You don’t want to potentially lose your home over the shopping spree you engaged in three years ago.”
Both Farrington and Fleming agreed that getting any sort of personal or home equity loan to make a large purchase or pay for a wedding might not be the best choice.
“Generally, you want to plan ahead and save up for non-essential large expenses,” said Farrington. “Paying any sort of interest on those items can set you back financially.”
Home equity loan vs. personal loan: Next steps
No matter your situation, it’s important to shop around for the best rates and terms to find a loan that works for you.
Fleming warned that no matter what type of loan you choose, it’s important to pay off the debt as quickly as possible. Make a plan to get rid of the debt before the end of your term if you can.
“Too many people finance things for longer than their useful life,” said Fleming. “If you’re only going to drive a car for three more years, you don’t want to finance its repairs for five years. From a personal finance point of view, it just doesn’t make sense.”
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Interested in a personal loan?Here are the top personal loan lenders of 2019!
|Lender||APR Range||Loan Amount|
|1 Includes AutoPay discount. Important Disclosures for SoFi.
2 Includes AutoPay discount. Important Disclosures for Payoff.
3 Important Disclosures for FreedomPlus.
4 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
5 Important Disclosures for LendingPoint.
6 Important Disclosures for LendingClub.
All loans made by WebBank, Member FDIC. Your actual rate depends upon credit score, loan amount, loan term, and credit usage & history. The APR ranges from 6.95% to 35.89%*. The origination fee ranges from 1% to 6% of the original principal balance and is deducted from your loan proceeds. For example, you could receive a loan of $6,000 with an interest rate of 7.99% and a 5.00% origination fee of $300 for an APR of 11.51%. In this example, you will receive $5,700 and will make 36 monthly payments of $187.99. The total amount repayable will be $6,767.64. Your APR will be determined based on your credit at the time of application. The average origination fee is 5.49% as of Q1 2017. In Georgia, the minimum loan amount is $3,025. In Massachusetts, the minimum loan amount is $6,025 if your APR is greater than 12%. There is no down payment and there is never a prepayment penalty. Closing of your loan is contingent upon your agreement of all the required agreements and disclosures on the www.lendingclub.com website. All loans via LendingClub have a minimum repayment term of 36 months. Borrower must be a U.S. citizen, permanent resident or be in the United States on a valid long term visa and at least 18 years old. Valid bank account and Social Security number are required. Equal Housing Lender. All loans are subject to credit approval. LendingClub’s physical address is: LendingClub, 71 Stevenson Street, Suite 1000, San Francisco, CA 94105.
†Per reviews collected and authenticated by Bazaarvoice in compliance with the Bazaarvoice Authentication Requirements, supported by anti-fraud technology and human analysis. All reviews can be reviewed at reviews.lendingclub.com
**Based on approximately 60% of borrowers who received offers through LendingClub’s marketing partners between January 1, 2018 to July 20,2018. The time it will take to fund your loan may vary.
7 Important Disclosures for Earnest.
8 Important Disclosures for Avant.
* The actual rate and loan amount that a customer qualifies for may vary based on credit determination and other factors. Funds are generally deposited via ACH for delivery next business day if approved by 4:30pm CT Monday-Friday. Avant branded credit products are issued by WebBank, member FDIC.
** Example: A $5,700 loan with an administration fee of 4.75% and an amount financed of $5,429.25, repayable in 36 monthly installments, would have an APR of 29.95% and monthly payments of $230.33
* Important Disclosures for Upgrade Bank.
Upgrade Bank Disclosures
** Accept your loan offer and your funds will be sent to your bank via ACH within one (1) business day of clearing necessary verifications. Availability of the funds is dependent on how quickly your bank processes this transaction. From the time of approval, funds should be available within four (4) business days.
|5.75% – 16.24%1||$5,000 - $100,000|
|7.46% – 35.99%||$1,000 - $50,000|
|7.99% – 35.89%*||$1,000 - $50,000|
|5.99% – 24.99%2||$5,000 - $35,000|
|5.99% – 29.99%3||$7,500 - $40,000|
|6.79% – 20.89%4||$5,000 - $50,000|
|9.99% – 35.99%5||$2,000 - $25,000|
|6.95% – 35.89%6||$1,000 - $40,000|
|6.99% – 18.24%7||$5,000 - $75,000|
|9.95% – 35.99%8||$2,000 - $35,000|