Navigate personal loan and home equity loan options. Discover benefits, considerations, and choose wisely.
No matter your background, upbringing, or social strata, there will likely come a time when you’ll need to borrow money. Maybe it’ll be from a friend or a loved one to cover an unexpected cost or make it to payday. Or maybe it will come from a bank, taking the shape of a personal loan. Whether you need to borrow money now or plan to in the future, you have plenty of options. But while having options can be comforting, it can sometimes be difficult to choose the right pathway. And when it comes to personal loans vs. home equity loans, how do you know which one is right for you?
Personal loans are one of the more popular loan options, allowing borrowers to take out a loan directly from a bank or credit union to use however they see fit.1 But home equity loans, too, have become a popular choice, offering homeowners a way to leverage home equity toward major purchases, home renovations, or even everyday expenses. While both of these tools serve a similar purpose of providing you with funds, they differ drastically in terms of their features, benefits, and drawbacks.
To decide which pathway makes the most sense for your needs in the personal loan vs. home equity loan debate, you should first understand the nuances of both personal loans and home equity loans –– as well as their individual pros and cons. Discover more about these two loan options to help you determine which one best aligns with your financial goals.
Before we compare personal loans and home equity loans to help you make the right choice, let’s outline what each of these loan products are.
Simply put, a personal loan is a loan from a lender, like a bank or a credit union. These loans are typically unsecured by a lender, meaning you are not required to put up collateral to secure the loan. Instead, lenders will assess your creditworthiness and income to determine if you qualify for a personal loan (and at what interest rate.) With that said, personal loans can also be secured, in which case borrowers will be required to put up collateral, to steer clear of a higher interest rate. Funds from a personal loan arrive in a lump sum and can be used for various purposes: financing large purchases, as part of a debt consolidation strategy, or even funding a grand vacation.2 The loan amount you can secure will come down to your credit score and income, as well as the lender's own policies, which we’ll discuss below.
Unlike a personal loan, a home equity loan allows you to tap into the equity –– the difference between your share of ownership and your home’s value –– you've built up in your home by taking out a loan against this home equity line. Home equity loans are often referred to as a second mortgage since you will repay this loan over the course of years or decades while also repaying your mortgage. But whereas personal loans can be unsecured, home equity loans are secured by your property. This can result in lower interest rates, but it also means that failure to keep up with your loan can mean losing your home to foreclosure (even if your primary mortgage is in good standing.)
See related: Second Mortgage vs. Home Equity Loan
Now that we have a basic understanding of both personal loans and home equity loans, let's explore the key differences between these two borrowing options –– and the factors you should consider when deciding for yourself.
We’ve already mentioned that a personal loan is different from a home equity loan by being primarily an unsecured loan, which can have a significant impact on borrowers. But because home equity loans are secured by your property, they generally come with significantly lower interest rates than their unsecured alternatives. While a three or four-percent difference in interest rates might not seem much, this can equate to hundreds or thousands of dollars over the span of a repayment period in your loan term.
Loan amounts also come into play when considering personal loans vs. home equity loans, as personal loans can be for as little as $1,000 or as much as $100,000.3 Contrast this with home equity loans, which allow homeowners to borrow as much as 80% of their available home equity in some cases, and personal loan amounts may pale in comparison. Further, personal loans generally contain a repayment term to be paid back within seven years, while home equity loans can be repaid in as much as 15.
The argument of unsecured vs. secured loans is in some ways one of interest rates, but it’s primarily one of risk. Perhaps the biggest strike against home equity is the inherent risk of effectively gambling with your property by taking on a secured loan. If protecting your home is more valuable than a considerable interest rate discount, you may find a personal loan to be the better option.
With that said, personal loans also carry their fair share of risk –– but rather than risking your home, you’re risking your financial future. High interest rates can make unwieldy monthly payments out of seemingly small loan amounts, meaning you should understand your rates and terms to avoid getting in too deep and doing significant damage to your credit score and overall credit profile.
Despite their limitations, countless perks make personal loans appealing to many borrowers. Here are just a few of them worth noting.
Personal loans offer considerable flexibility –– especially regarding how these funds can be leveraged. Whether you need to eliminate or consolidate high-interest credit card debt, tackle unexpected home repairs, finance a wedding, or pay for a costly education, personal loans offer you a high degree of freedom.
What’s more: unlike home equity loans, personal loans don’t require you to have tens of thousands of dollars in equity to draw from, thus opening doors for more borrowers who may not own a home or have yet to accrue substantial equity.
Another clear advantage personal loans have over home equity loans lies in the application and approval process. Whereas approval for a home equity loan can take several weeks –– with a more extensive application process, to boot –– funds for a personal loan can be issued in as little as a week in some cases.4 This can make a world of difference to cash-strapped borrowers, or those who are otherwise on a tight timeline to access funds. And because home equity loans rely heavily on the property and primary mortgage, the application process itself can be a more drawn-out affair than that of a personal loan.
While personal loans offer solid flexibility, relatively easy applications, and fast funding, home equity loans come with their own benefits that may give them the edge for certain borrowers.
Perhaps the greatest appeal of home equity loans is that interest rates for these products average between four and eight percent. Personal loan interest rates, on the other hand, can far exceed 30 percent. Again, this is because home equity loans are secured by your home itself, therefore decreasing your lender’s risk –– while simultaneously increasing yours. Borrowers willing to assume this risk may save thousands of dollars throughout a decade-long repayment period, but the more risk-averse may find a better (and safer) option elsewhere.
Home equity loans also allow you to put your hard-earned home equity to work –– something that many homeowners won’t experience until they make the decision to sell. As a homeowner, it can be empowering to see your months and years of mortgage payments go toward a meaningful purpose, whether that means funding a major home renovation or tackling the high-interest debts that are standing between you and your financial goals. Make no mistake: A home equity loan is still a loan from a lender, but some may find borrowing from home equity to be preferable to a personal loan.
We’ve explored the pros and cons of home equity loans and personal loans –– but how do you decide which one is right for you? To crown a victor in the personal loan vs. home equity loan debate, you’ll have to consider both your needs and your short- and long-term goals.
To decide between a personal loan and a home equity loan, you’ll want to first evaluate your immediate financial needs. If you’re in urgent need of a cash infusion, you may not have the time to wait a few weeks for approval on a home equity loan. If you have a specific expense in mind, such as a major home repair or some other costly venture, you may have to consider if the $100,000 cap of a personal loan will offer you the flexibility you need. The right pathway might emerge from this simple introspection alone.
While considering your current needs, you should also consider your credit history and credit score. Personal loans offer added leniency for borrowers whose credit scores may be less than stellar, whereas many home equity loan lenders require you to have a credit score of 620 or higher. Conversely, if your credit score is strong enough to afford you the long-term interest savings of a home equity loan, you may find this is the clear choice.
As you look inward today, be sure to keep tomorrow in mind –– as your long-term financial goals will help guide your decision. Personal loans often come with shorter terms, meaning you'll be able to pay off the loan more quickly (at the expense of potentially higher monthly payments.) But home equity loans, with their extended terms and lower interest rates, may stick around for longer with repayment feeling like less of a burden.
An understanding of your future financial goals will help you determine how the loan will (or won’t) fit into your overall financial plan. For those looking for a short-term solution to address immediate financial needs, a personal loan may be the perfect fit. But if you're not planning to sell your home anytime soon, are comfortable with a longer commitment, and want to leverage your home equity, a home equity loan could align better with your objectives. When choosing between personal loans and home equity loans, think about where you want to be in five, ten, or fifteen years –– then choose the tool that will best help you get there.
There’s no right answer when it comes to personal loans vs. home equity loans, but there is an answer that’s right for you. And if we’ve proven anything in the above paragraphs, it’s that deciding whether to borrow directly from a lender through a personal loan or tap into your home equity via a home equity loan will mean extended soul-searching –– and even more research. And while you’re researching the best path for you, we urge you to dive into Truehold’s sale-leaseback.
Our sale-leaseback isn’t a high-interest loan from a lender like a personal loan, nor is it a means of freeing up your home equity only to pay it back for the next two decades. Rather, it’s a way for homeowners to access their home equity while continuing to live in a cherished home. This means you can do everything you would with a personal loan or home equity loan, like eliminating nagging credit card debt to prevent bad credit, or doing a bit of globetrotting, without adding another bill (and thousands of dollars in interest) to your list of responsibilities.
When you sell your home to Truehold in exchange for your equity, you can move on to greener pastures –– taking your time to do so and paying rent while you find the perfect space. Or, you rent your existing space while we take care of property insurance, major home repairs, and the other time-consuming tasks that can often sap the joy from homeownership. While you continue to explore personal loans and home equity loans, make sure you’re cross-comparing Truehold’s sale-leaseback. You might find that this is the strategy you’ve been looking for all along.
Want to learn more about Truehold’s sale-leaseback? Contact us, and discover the full breadth of benefits from one of our trusted advisors.
Sources:
1. Investopedia. The Best Ways to Borrow Money. https://www.investopedia.com/articles/basics/07/financing-options.asp
2. Bankrate. What is a personal loan? https://www.bankrate.com/loans/personal-loans/what-is-a-personal-loan/
3. Forbes. Best Personal Loans of September 2023. https://www.forbes.com/advisor/personal-loans/best-personal-loans/
4. Bankrate. How long does it take to get a personal loan? https://www.bankrate.com/loans/personal-loans/how-long-does-it-take-to-get-a-personal-loan/
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