Home Equity Loan Versus Personal Loan

Key Takeaways 

• A home equity loan allows you to borrow against the equity you’ve built up in your home, with the property serving as collateral. 
• Unlike a home equity loan, a personal loan is unsecured and doesn’t require collateral. Instead of your home equity, lenders weigh factors such as your income, credit history and debt-to-income ratio. 
• A home equity loan typically has a lower maximum interest rate, shorter repayment terms and lower credit score requirements. 
• A personal loan has a simpler and faster application process, and more flexible loan amounts than most home equity loans. 

If you own your home but need some extra cash, you may be facing the “home equity loan vs. personal loan” dilemma. And no wonder. 

U.S. homeowners had $32 trillion in equity at the end of 2023, according to the Federal Reserve Bank of St. Louis. For homeowners with a mortgage, that equates to an average equity stake of about $300,000, reported Bankrate. Like many Americans, you may have built up enough equity in your home that you could access that some of that cash by taking out a home equity loan. 

At the same time, personal loans have skyrocketed in popularity, thanks in part to the convenience and ease of use offered by personal loan lenders. As of the fourth quarter of 2023, 23.5 million Americans had a personal loan, an increase of 4.4% over the previous year, according to LendingTree, an online marketplace connecting consumers with lenders.  

Figuring out which option is right for you starts with gaining a better understanding about how a home equity and personal loan differ. 

What is a home equity loan? 

A home equity loan is a loan you borrow against the equity you’ve built up in your home. Your equity is your home’s current market value minus anything you owe on the property, such as a mortgage or any other liens. 

When you take out a home equity loan, you receive a lump sum upfront, typically up to 80-90% of your equity, with the property serving as collateral. You then repay that amount in monthly installments plus interest. 

Home equity loan pros and cons 

Pros 

• Lower interest rates: A home equity loan typically comes with a lower interest rate, around 8% to 9% currently. Personal loan rates may start at the same rate but can go as high as 35%. 
• Longer repayment terms: With a home equity loan, you can expect a term of 5-15 years. Personal loan terms are 2-7 years on average. 
• Tax incentives: If you’re using the loan to purchase, build or improve your home, you can usually deduct the interest on your taxes. 

Cons 

• You must have sufficient equity: You typically need to have at least 20% equity in the property. Many new homeowners don’t meet this requirement, and building enough equity could take years. 
• Your home is at risk: Because your home serves as collateral, you risk losing it if you don’t repay the loan. 
• Longer application process: The journey from application to approval could take anywhere from two weeks to two months, as it normally involves an in-person evaluation of the property. 

What is a personal loan? 

Unlike a home equity loan, a personal loan is unsecured, which means it doesn’t require collateral. Lenders decide whether to extend a loan based on factors such as your credit score and history, income and debt-to-income ratio, but do not consider the value of your home. 

If the lender approves your application, you get a lump sum that you repay in monthly payments with interest. 

Personal loans pros and cons 

Pros 

• Hassle-free application: Many lenders now allow you to complete the process online. You fill out a form and submit electronic documentation. 
• Time savings: With a personal loan, you can apply, get approval, and access cash generally within a week or less. 
• Larger loan amounts: You can typically borrow up to about 80% of your equity with a home equity loan, and up to $100,000 with a personal loan. 

Cons 

• You need strong credit: To qualify for a home equity loan, you will typically need a minimum credit score of 620. For a personal loan, you may qualify with a score just above 600, but to be eligible for a competitive rate, you may need a credit score of 690 or higher. 

Home equity loan versus personal loan: Which one is best for you? 

A home equity loan may be a good option if: 

• You have built up a significant amount of equity: If you have sufficient equity, you could borrow up to $500,000 or even more – considerably more than with a personal loan. 
• You’re looking for rates below 10%: A lower rate means your monthly payments will be smaller. 
• Your credit score is less than ideal: It can be easier to qualify for a secured loan with a lower credit score. However, you likely won’t get the lowest possible interest rate. 
• You’re looking to buy, build or renovate your home: If so, you may be able to deduct the interest on your taxes. 

In contrast, you may want to consider a personal loan if: 

• You don’t have much equity: If your equity is below 20%, you may not be eligible for a home equity loan at all. 
• You don’t want to put your home on the line: Personal loans are usually unsecured. 
• You want to borrow a smaller amount: Most banks set a minimum loan amount of $10,000 or more for home equity loans. A personal loan principal may be as little as $1,000. 

In either case, you should have a good idea of how much cash you’ll need before applying, as both loan types come in lump sums. Both also have fixed rates and payments, so you’ll know what your monthly requirement will be from the start. 

Home equity loan versus personal loan: The bottom line 

Ultimately, which type of loan would work best for you depends on your personal goals and circumstances. To find the best option for you, you may find it helpful to speak with a professional financial adviser and compare quotes from multiple lenders before applying. 

If you’re a homeowner with equity in your home and seeking cash to pay off debt or for a major life purchase, consider alternatives to debt-based products as well. Equity-based products such as Unlock’s home equity agreement solve problems that traditional loans don’t.