Home equity loans and personal loans are both key in a financial crisis. In comparing a home equity loan vs personal loan, we find that they both have unique advantages and considerations, making them better and more valuable. These loans can help renovate houses, consolidate debt, cover large medical expenses, and serve other purposes.
What is a home equity loan?
A home equity loan allows borrowers to use their home’s equity as collateral. Home equity loan lenders will let you borrow up to 80% to 85% of your home’s value by looking at other factors like your credit score, debt-to-income ratio, and income history.
They offer a lower interest rate range between 4% to 8%, which suits your budget. If you fail to repay the loan, the lender can bring your house. The exact interest rate depends on your income, credit score, and the value you want to borrow.
Pros
Affordable interest rates
Home equity loans allow for minor interest rates. On average, home equity loans lower rates, making them an appealing option for saving on interest costs.
Tax deduction
Sometimes, paying interest on a home equity loan can be tax-deductible. The interest deduction can provide significant annual tax savings if you use the funds for home improvements.
Longer repayments
Home equity loans often offer extended repayment time compared to other loans. Typically, a home equity loan’s repayment period is 5 to 30 years. Therefore, homeowners can choose a repayment plan that suits their financial situation and allows for manageable monthly payments.
Cons
Risk of foreclosure
Home equity loans use your home as collateral. You could lose your home if you cannot repay the loan in the allocated periods.
Closing expenses
Home equity loans come with closing costs and fees like a mortgage. These include assessment fees, identification insurance, and application fees, affecting your overall cost.
Tying-up equity
This loan uses your home as collateral. Therefore, you can only sell your property after total repayments.
What is a Personal loan?
A personal loan can be directly borrowed from online lenders, credit unions, and banks. It is suitable for those who don’t have properties or equities but have enough income to repay the loan. It does not need any property as collateral, like a home equity loan or other loans.
Lenders approve your loan demand based on your income, credit worth, or other factors in this loan. Personal loans come with interest rates ranging from around 6% to 36%, that’s very high compared to home loans. This loan will allow you to repay the amount in one to seven years with monthly installments. According to the US statistics data, in 2022, 22.5 million Americans borrowed personal loans.
Pros
Flexible with fund usage
A personal loan allows you to use borrowed funds for your needs, whether covering medical expenses or solving your financial crisis.
No need for equity or collateral
Personal loans approve your loan demand without requiring any equity or property. They allow you to borrow a lump sum based on your income or creditworthiness.
Quick access to funds
After approving your loan demand, funds will be quickly disbursed to your account within a few business days, enabling quick access to funds for your needs.
Fixed repayments
A personal loan allows you to repay your loan within one to seven years, which may help you manage your budget according to your income, and you can repay the entire loan in short periods.
Cons
Higher interest rates
Unlike home equity and other loans, personal loans often have the highest interest rates.
Extra cost and charges
Some personal loans include documentation fees or extra charges. These additional penalties will affect your real affordability of the loan.
Limited borrow funds
Lenders approve your borrowing demand based on your income or creditworthiness. Therefore the maximum amount of funds depends on your financial stability.
Beem can help you find, compare options and choose the best personal loan for you to meet your needs.
also know about: business loan vs Personal Loan
Home Equity Loan vs Personal Loan: What’s the difference?
When you want to borrow loans, it’s essential to understand the critical difference between home equity loans vs personal loans. A significant difference between a home equity loan and a personal loan is security. Home loans are secured by lenders using your home as collateral. In contrast, personal loans are unsecured because they don’t require collateral.
Here is the key distinction between a Home Equity Loan vs Personal Loan:
| Aspects | Home Equity Loan | Personal Loan |
| Loan amount | Around 80% to 85% of your home’s value | Up to $100,000 |
| Interest rates | 4% to 8%. | 6% to 36% |
| Repayment duration | 5 to 30 years | 1 to 7 years |
| Fees include | Original and late fees | Original, documentary, penalties, and late fees |
| Purpose | Used for particular purposes like home renovation or large medical expenses | Allows using funds for various purposes or personal needs |
| Approval process | Typically lengthier | Generally fast and simple |
| Risk for | Potential loss of property if the loan is not repaid on time | No risk of losing assets |
Home Equity Loan vs Personal Loan: Which is Better?
Both home equity and personal loans are fixed-rate financing options that you get in a lump sum and repay in equal installments; that’s all the similarities they share. Which one is better for you depends on your financial situation and personal preferences.
With a personal loan, you can borrow up to $100,000. In contrast, the money you will get with a home equity loan is up to 80% of your home’s value minus your outstanding mortgage. So if you don’t have a house or don’t want to put up your house as collateral, then a personal loan is a better option for you. Still, the interest rates are higher for personal loans. Carefully research different options and lenders to decide which is better for you.
also know about: Personal Loans vs Auto Loans
Conclusion
The choice between a home equity loan vs personal loan mainly depends on your financial goals. Both have their consideration to weigh before applying for a loan. A home equity loan is more suitable for you when you require large funds. In contrast, a personal loan allows you to get instant cash. Either way, deciding on the better option between a home equity loan vs personal loan depends on the desired lump sum amount, interest rates, and flexibility. With thoughtful consideration, you can select a specific loan option that aligns with your financial stability and helps to achieve your objective.
Struggling with consolidating debt, making major purchases, or meeting unexpected costs? Beem can help. Beem’s personal loan feature can help you zero in on the kind of loan that suits your requirements best and helps you sail through a financial crunch.
FAQs
What is the difference between a home loan and a personal loan?
A. A home loan is a secured loan. In the case of a home loan, the home acts as collateral and can be seized by the bank or lending company in case of a default in loan repayment. A personal loan, on the other hand, is an unsecured loan. Hence, in the case of a personal loan, there is no collateral requirement.
Is a personal loan converted to a home equity loan?
You can avail of another loan and have two, but converting isn’t possible.
Is a home equity loan the same as a loan against property?
There are two types of loans against property available here: home equity and house mortgage loans. The borrower can get a home equity loan against the equity they hold in a property. They can also get a house mortgage loan against fully constructed properties they fully own.
