Home equity loan vs. personal loan: how to choose the right option

How you choose to borrow has a big impact on everything from costs to ease of use. A home equity loan and a personal loan both involve borrowing a lump sum, but they work very differently. 

A home equity loan is secured by your home, and often offers lower interest rates and longer repayment terms. A personal loan is unsecured and typically faster to get, but usually comes with higher rates and shorter repayment periods.

When you’re considering a home equity loan vs. personal loan, the best option depends in part on how much you hope to borrow, and how quickly you need the money. Here's how to make the right call.

What's the difference between home equity loans vs. personal loans?

The biggest difference between a home equity loan and a personal loan is collateral. A home equity loan is secured by using your home as collateral, which may mean lower interest rates, but also means taking on more risk. Personal loans don't use collateral, making them faster and simpler to get, though they tend to have higher interest rates than home equity loans.

Let's take a more in-depth look at the differences.

Secured vs. unsecured

A home equity loan is a type of mortgage, and therefore it’s secured by your home. In other words, your home is collateral; if you stop making payments, the lender could foreclose on your home and sell it to recoup the loan.

Most personal loans are unsecured—you don't have to offer anything of value (like your home or car) to get the loan. This makes them riskier for the lender, since there are no assets to take if you stop making payments.

The difference in the amount of risk for the lender drives most of the other differences between the two loan types.

Interest rates

A home equity loan usually has a lower interest rate than a personal loan because lenders charge you less when they take on less risk. Your interest rate can still vary based on your creditworthiness, but it's generally going to be lower than rates for unsecured products.

Personal loans tend to have interest rates higher than those of home equity loans but lower than typical credit cards. The loan rate you qualify for depends very heavily on your credit score and financial details, and the range of potential rates is often larger than for secured loans. Generally speaking, the higher your credit score, the lower your interest rate.

Maximum loan amounts 

The amount you can borrow through a personal loan depends on the lender, your credit standing, your income, and how much other debt you carry. Generally, you can borrow anywhere from a few thousand dollars to $50,000 with a personal loan. 

The same factors can influence your maximum home equity loan size, but a bigger factor is typically your home's equity. This is how much your home is worth above what you owe on it. For this reason, home equity loans tend to have higher loan limits than personal loans do. Some home equity loans can top six figures depending on your qualifications.

Speed of funding

Personal loans are the clear winners when it comes to processing times. Some lenders offer funding within 24 hours of loan approval. If you're in a financial pinch and need the money sooner than later, a personal loan could get you cash as soon as the next day in some cases. 

Home equity loans tend to take several weeks or longer. That's because home equity loans generally require a lot more paperwork, as well as a home appraisal (though lenders that use digital valuation could have a faster turnaround time).

Time to repay 

Personal loans usually have much shorter repayment terms than home equity loans—two to five years is average. When you choose your repayment term, you might find that you can lower the interest rate by opting for a shorter term.

Home equity loans have longer repayment terms, with loans ranging from five to 30 years depending on the loan and lender. While a longer loan could mean lower monthly payments, it could also mean higher interest costs overall.

How are a home equity loan and a personal loan similar? 

Personal loans and home equity loans are types of installment loans. This means you get a lump sum at closing, then make fixed monthly payments for the full loan term. Both kinds of loans usually have a fixed interest rate, so it’s locked in during the life of the loan. 

Both kinds of loans also give you a lot of flexibility in how you use the money. They can be used to meet big financial goals, like paying off high-interest credit cards. Some common reasons to use a personal loan or home equity loan include:  

• Replacing kitchen appliances

• Paying for dental work 

• Covering an emergency car repair

• Renovating your kitchen

• Paying unexpected medical bills

• Replacing your roof

Whether you need cash for life’s curveballs or for a planned expense, personal loans and home equity loans can both be great funding options. 

When a home equity loan may make more sense

A home equity loan could make the most sense for you if the following is true:

• You own a home and have a good amount of equity.

• You need a larger loan amount.

• You want a lower interest rate or a longer repayment period.

• You're comfortable using your home as collateral.

For example, you might take out a home equity loan to consolidate high-interest debt. This could give you a predictable monthly payment during the repayment period, and possibly a lower interest rate than you could get with a personal loan.

When a personal loan may be the better option

A personal loan could be your best choice in the following situations:

• You need funds quickly.

• You don't want to use your home as collateral, or you're not a homeowner with sufficient equity to borrow against.

• You're borrowing a smaller amount.

• You want a simpler approval process.

What’s better, a home equity loan or a personal loan?

There's no one-size-fits-all answer. Rather, it's based on your situation, needs, and preferences. Consider these characteristics of home equity loans and personal loans.

Loans through Achieve: personal loan vs. the Achieve home equity loan

Loan Through Achieve Personal Loans and a HELOC from Achieve loans stand out in some key ways. Here’s how.

Loans through Achieve Personal Loans

Loans through Achieve Personal Loans offer fixed-rate personal loans for just about any expense, including debt consolidation and large purchases. If approved, you could borrow up to $50,000 with a repayment term of up to five years. Loan Through Achieve Personal Loans offers several ways to get a discounted interest rate:

• Apply with a qualified co-applicant

• If you’re consolidating debt, ask an Achieve Personal Loans agent to see if they can send the funds straight to your creditors 

• Show proof of sufficient retirement savings (these savings are not used as collateral).

HELOC from Achieve loans

Achieve Loans combines features of a home equity loan and a home equity line of credit (HELOC) by offering a fixed-rate HELOC. The fixed interest rate protects you from fluctuating rates and offers more predictability during the repayment period.

You get a five-year draw period during which you can borrow, repay, and borrow more as often as you like, up to your credit limit. Overall terms of 10, 15, 20, or 30 years are available.

Understanding the differences between a home equity loan and a personal loan is the first step toward a smart decision that could help you get you closer to your financial goals. If you would like more help, call us at 1-800-920-0045, or apply online, and an Achieve Loans Expert can walk you through the options.