Home Equity Loan vs. Personal Loan: How to Get the Funds You Need

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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
Collateral Yes No
Credit check required Yes Yes
Maximum loan amount Depends on available equity Varies
Tax-deductible interest Yes, in some cases No
Funded quickly No Yes
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.”

However, beware consolidating high-interest credit card debt with a home equity loan. You might be better off applying for a personal loan.

“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 2018!
LenderAPR RangeLoan Amount 
1 Includes AutoPay discount. Important Disclosures for SoFi.

SoFi Disclosures

  1. Personal Loans: Fixed rates from 6.990% APR to 14.865% APR (with AutoPay). Variable rates from 6.255% APR to 12.555% APR (with AutoPay). SoFi rate ranges are current as of September 1, 2018 and are subject to change without notice. Not all rates and amounts available in all states. See Personal Loan eligibility details. Not all applicants qualify for the lowest rate. If approved for a loan, to qualify for the lowest rate, you must have a responsible financial history and meet other conditions. Your actual rate will be within the range of rates listed above and will depend on a variety of factors, including evaluation of your credit worthiness, years of professional experience, income and other factors. See APR examples and terms. Interest rates on variable rate loans are capped at 14.95%. Lowest variable rate of 6.255% APR assumes current index rate derived from the 1-month LIBOR of 2.08% plus 4.425% margin minus 0.25% AutoPay discount. For the SoFi variable rate loan, the 1-month LIBOR index will adjust monthly and the loan payment will be re-amortized and may change monthly. APRs for variable rate loans may increase after origination if the LIBOR index increases. The SoFi 0.25% AutoPay interest rate reduction requires you to agree to make monthly principal and interest payments by an automatic monthly deduction from a savings or checking account. The benefit will discontinue and be lost for periods in which you do not pay by automatic deduction from a savings or checking account.

    To check the rates and terms you qualify for, SoFi conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull.See Consumer Licenses.
  2. Minimum Credit Score: Not all applicants who meet SoFi’s minimum credit score requirements are approved for a personal loan. In addition to meeting SoFi’s minimum eligibility criteria, applicants must also meet other credit and underwriting requirements to qualify.
  3. SoFi Personal Loans are not available to residents of MS. Maximum interest rate on loans for residents of AK and WY is 9.99% APR, for residents of IL with loans over $40,000 is 8.99% APR, for residents of TX is 9.99% APR on terms greater than 5 years, for residents of CO, CT, HI, VA, SC is 11.99% APR, and for residents of ME is 12.24% APR. Personal loans not available to residents of MI who already have a student loan with SoFi. Personal Loans minimum loan amount is $5,000. Residents of AZ, MA, and NH have a minimum loan amount of $10,001. Residents of KY have a minimum loan amount of $15,001. Residents of PA have a minimum loan amount of $25,001. Variable rates not available to residents of AK, TX, VA, WY, or for residents of IL for loans greater than $40,000.
  4. Terms and Conditions Apply: SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. To qualify, a borrower must be a U.S. citizen or permanent resident in an eligible state and meet SoFi’s underwriting requirements. Not all borrowers receive the lowest rate. To qualify for the lowest rate, you must have a responsible financial history and meet other conditions. If approved, your actual rate will be within the range of rates listed above and will depend on a variety of factors, including term of loan, a responsible financial history, years of experience, income and other factors. Rates and Terms are subject to change at anytime without notice and are subject to state restrictions. SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income Based Repayment or Income Contingent Repayment or PAYE. Licensed by the Department of Business Oversight under the California Financing Law License No. 6054612. SoFi loans are originated by SoFi Lending Corp., NMLS # 1121636. (www.nmlsconsumeraccess.org)

2 Includes AutoPay discount. Important Disclosures for Payoff.

Payoff Disclosures

  1. All loans are subject to credit review and approval. Your actual rate depends upon credit score, loan amount, loan term, credit usage and history. Currently loans are not offered in: MA, MS, NE, NV, OH, and WV.

3 Important Disclosures for FreedomPlus.

FreedomPlus Disclosures

  1. All loans available through FreedomPlus.com are made by Cross River Bank, a New Jersey State Chartered Commercial Bank, Member FDIC, Equal Housing Lender. All loan and rate terms are subject to eligibility restrictions, application review, credit score, loan amount, loan term, lender approval, and credit usage and history. Eligibility for a loan is not guaranteed. Loans are not available to residents of all states – please call a FreedomPlus representative for further details. The following limitations, in addition to others, shall apply: FreedomPlus does not arrange loans in: (i) Arizona under $10,500; (ii) Massachusetts under $6,500, (iii) Ohio under $5,500, and (iv) Georgia under $3,500. Repayment periods range from 24 to 60 months. The range of APRs on loans made available through FreedomPlus is 4.99% to a maximum of 29.99%. APR. The APR calculation includes all applicable fees, including the loan origination fee. For Example, a four year $20,000 loan with an interest rate of 15.49% and corresponding APR of 18.34% would have an estimated monthly payment of $561.60 and a total cost payable of $7,948.13. To qualify for a 4.99% APR loan, a borrower will need excellent credit on a loan of $15,000 with a term of 24 months, and qualify for at least two of the following discounts: (1) add a co-borrower who has sufficient income; (2) use at least fifty percent of the loan proceeds to directly pay off existing debt; or (3) show proof of having at least forty-thousand dollars in retirement savings – contact FreedomPlus for further details.

4 Important Disclosures for Citizens Bank.

Citizens Bank Disclosures

  1. Personal Loan Rate DisclosureFixed interest rates from 6.49% – 19.49% (6.49% – 19.49% APR) based on applicable terms. Lowest rates range from 5.99%-18.99% (5.99%-18.99% APR), are for eligible applicants, require a 3-year repayment term, and include our Loyalty and Automatic Payment Discounts of 0.25 percentage points each, as outlined in the Loyalty Discount and Automatic Payment Discount disclosures. Subject to additional terms and conditions, and rates are subject to change at any time without notice. Such changes will only apply to applications taken after the effective date of change.
  2. Loyalty Discount: The borrower will be eligible for a 0.25 percentage point interest rate reduction on their loan if the borrower has a qualifying account in existence with us at the time the borrower has submitted a completed application authorizing us to review their credit request for the loan. The following are qualifying accounts: any checking account, savings account, money market account, certificate of deposit, automobile loan, home equity loan, home equity line of credit, mortgage, credit card account, student loans or other personal loans owned by Citizens Bank, N.A. Please note, our checking and savings account options are only available in the following states: CT, DE, MA, MI, NH, NJ, NY, OH, PA, RI and VT. This discount will be reflected in the interest rate and Annual Percentage Rate (APR) disclosed in the Truth-In-Lending Disclosure that will be provided to the borrower once the loan is approved. Limit of one Loyalty Discount per loan, and discount will not be applied to prior loans. The Loyalty Discount will remain in effect for the life of the loan.
  3. Automatic Payment Discount: Borrowers will be eligible to receive a 0.25 percentage point interest rate reduction on their Citizens Bank Personal Loan during such time as payments are required to be made and our loan servicer is authorized to automatically deduct payments each month from any bank account the borrower designates. If our loan servicer is unable to successfully withdraw the automatic deductions from the designated account two or more times within any 12-month period, the borrower will no longer be eligible for this discount.

5 Important Disclosures for LendingPoint.

LendingPoint Disclosures

  • Loan approval is not guaranteed. Actual loan offers and loan amounts, terms and annual percentage rates (“APR”) may vary based upon LendingPoint’s proprietary scoring and underwriting system’s review of your credit, financial condition, other factors, and supporting documents or information you provide. Origination or other fees from 0% to 6% may apply depending upon your state of residence. Upon LendingPoint’s final underwriting approval to fund a loan, said funds are often sent via ACH the next non-holiday business day. LendingPoint makes loan offers from $2,000 to $25,000, at rates ranging from a low of 15.49% APR to a high of 34.49% APR, with terms from 24 to 48 months. The loan offer(s) shown reflect a 28 day payment cycle which is being offered as a courtesy as many of our customers are paid on a biweekly schedule and thus this may better align the loan payment dates with your actual income receipt schedule.

6 Important Disclosures for LendingClub.

LendingClub Disclosures

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.

Earnest Disclosures

  1. Earnest does not lend in Alabama, Delaware, Kentucky, Nevada, or Rhode Island.

8 Important Disclosures for Avant.

Avant Disclosures

* 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

* Your loan terms are not guaranteed and are subject to our verification and review process. You may be asked to provide additional documents to enable us to verify your income and your identity. This rate includes an Autopay APR reduction of 0.5%. By enrolling in Autopay your payments will be automatically deducted from you bank account. Selecting Autopay is optional. Annual Percentage Rate is inclusive of a loan origination fee, which is deducted from the loan proceeds. Late payments or subsequent charges and fees may increase the cost of your fixed rate loan. All loans made by WebBank, member FDIC. Please refer to Upgrade’s Terms of Use and Borrower Agreement for all terms, conditions and requirements.

** 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.

7.73% – 29.99%$1,000 - $50,000

Visit Upstart

6.26% – 14.87%1$5,000 - $100,000

Visit SoFi

6.99% – 35.97%*$1,000 - $50,000

Visit Upgrade

5.99% – 24.99%2$5,000 - $35,000

Visit Payoff

4.99% – 29.99%3$10,000 - $35,000

Visit FreedomPlus

5.99% – 18.99%4$5,000 - $50,000

Visit Citizens

15.49% – 34.49%5$2,000 - $25,000

Visit LendingPoint

6.95% – 35.89%6$1,000 - $40,000

Visit LendingClub

6.99% – 18.24%7$5,000 - $75,000

Visit Earnest

9.95% – 35.99%8$2,000 - $35,000

Visit Avant

Our team at Student Loan Hero works hard to find and recommend products and services that we believe are of high quality and will make a positive impact in your life. We sometimes earn a sales commission or advertising fee when recommending various products and services to you. Similar to when you are being sold any product or service, be sure to read the fine print understand what you are buying, and consult a licensed professional if you have any concerns. Student Loan Hero is not a lender or investment advisor. We are not involved in the loan approval or investment process, nor do we make credit or investment related decisions. The rates and terms listed on our website are estimates and are subject to change at any time. Please do your homework and let us know if you have any questions or concerns.