Best for excellent credit
SoFi personal loans
Finder rating: 4.3/5
Finder makes money from featured partners, but editorial opinions are our own. Advertiser Disclosure
If you’re a homeowner and need to borrow money for a renovation or other large expense, you may be considering getting a loan. Personal loans and home equity loans vary in a few ways. Read this guide to learn more about how they differ and how you can compare your options to make the best choice for your financial situation.
Home equity loans let you capitalize on the equity you have in your existing home. They enable you to utilize the capital gains of your house without needing to sell it. Your home equity is essentially the current value of your property minus the mortgage you owe.
For instance, consider that you own a house with a current market value of $500,000 and still owe $150,000. By using the formula given above, you’ll have about $350,000 in equity. Lenders usually offer around 80% of the value of the property as a home equity loan, so your total borrowing power may be closer to $280,000.
There are a number of different types of personal loans, such as car loans for purchasing vehicles, unsecured loans for a wedding, and so on. Here are a few points about different personal loans you can take out:
Since most personal loans, both unsecured and secured, only go up to $100,000, you’ll have much more available with a home equity loan if you need to tackle a large amount of debt.
However, even with an equivalent interest rate, a personal loan may still cost you less. Large monthly payments combined with a loan term of five or seven years means that the interest you’ll be paying on a personal loan will be less than the interest you’ll pay on a home equity loan.
Best for excellent credit
SoFi personal loans
Best for good credit
Marcus by Goldman Sachs personal loans
Best for fair credit
Upstart personal loans
Best for all credit types
Credible personal loans
None, if unsecured
Usually 1-7 years
Usually 20-30 years
Maximum loan amount
Can be up to $100,000
Typically up to 80% of your home value
Both home equity loans and personal loans offer specific benefits. In particular, the former is useful when you have aggregated equity in your house, while the latter is useful especially if you don’t have any assets to guarantee the loan.
Home equity loans can also offer considerably lower interest rates than personal loans. This means that your monthly payment for any additional amount you withdraw on the home loan can be lower than if you took out a personal loan.
Keep in mind, however, that this interest is spread over a much longer term – 25 or 30 years compared to a common maximum of seven years for a personal loan. Because of this, you may end up paying more in the long run with a home equity loan.
For both personal loans and drawing on home equity, you may need to pay associated fees depending on the requirements of the lender. If you stay with your current mortgage lender, you may be able to avoid refinancing fees depending on the flexibility of your loan, but again, it depends on the lender and on the loan in question. Refinancing with a separate lender almost always carries additional fees and charges, so this will need to be taken into account.
Making a decision can be tough when you have a lot of options and no guidance. You can use these questions to jumpstart your decision-making process so your final choice reflects your financial needs.
1. Why do you need the loan?
The purpose of the loan should weigh heavily in your decision to take out a home equity loan or a personal loan. If your debt is currently unsecured — usually as credit card debt or other, smaller loans — you may want to take out a personal loan rather than risk using your house as security. Conversely, home renovation projects that invest more value back into your home may be a worthwhile use of a home equity loan since you may save money on interest.
2. How much do you need to borrow?
Since the equity in your home is the amount your property is worth minus the amount you currently owe, you may not have enough equity built up to cover a large loan. After calculating how much equity you have in your home, you may want to invest in a personal loan if you don’t have enough equity to cover what you need to borrow.
3. Do you have the time to take out a second mortgage?
Personal loans are fast, especially when you opt for a nontraditional lender. Home equity loans take much more time and are essentially a second mortgage against your home, meaning you have to fill out more paperwork and wait for a bank to process it.
4. Are you okay with using your home as collateral?
Using your home as collateral is risky business. If you’re unable to pay, your lender has every right to foreclose on your home, leaving you with debt and no place to go. A home equity loan should only be borrowed if you know you’ll have the money to pay back what you owe. Otherwise, an unsecured personal loan may be the better decision.
Consider that you’re five years into your 30-year mortgage and you need a loan of $20,000.
A secured personal loan has an interest rate of 8.90% while a home equity loan has a rate of 6.39%. Your monthly mortgage payments will increase by $150 if you take on the home equity loan, which is less expensive than the $321 payment for the personal loan.
However, over the life of your mortgage, you’ll pay more in interest on the home equity loan than you would on the personal loan. Even though the interest rate is higher on the personal loan, it will still be cheaper over the long run.
The decision rests in whether you want lower monthly payments or a less expensive loan.
It’s worth noting that the longer you carry your debt, the more you pay in interest. That’s why choosing a loan with the shortest repayment term you can afford usually saves you money in the long run.
Borrowing against your home’s equity too frequently could be costly. Carefully examine the terms to see if a personal loan with a shorter repayment period might work better for you.
Personal loan vs. Line of credit
Personal loan vs. Mortgage
Personal loan vs. 401(k) loan
Personal loan vs. Business loan
Personal loan vs. Student loan
Personal Loan vs. Home equity line of credit
Alternative financing that lets you tap into the value of your crypto without having to sell it.
How Guaranteed Rate and Rocket Mortgage stack up against each other.
How Credible and SoFi stack up against each other.
If you’re considering using Lenme for a pay advance but its negative reviews are holding you back, we’ve lined up 7 alternatives that could offer more reliability and transparency.
Money Management International is a solid credit counseling company, but watch for lack of transparency with its fees.
A simple online form to find lenders — but it lacks specific information to help guide your choice.
How SoFi and LendingTree stack up against each other.
How New American Funding and Rocket Mortgage stack up against each other.
How SoFi and Rocket Mortgage stack up against each other.
How Veterans First and Veterans United stack up against each other.
finder.com is an independent comparison platform and information service that aims to provide you with the tools you need to make better decisions. While we are independent, the offers that appear on this site are from companies from which finder.com receives compensation. We may receive compensation from our partners for placement of their products or services. We may also receive compensation if you click on certain links posted on our site. While compensation arrangements may affect the order, position or placement of product information, it doesn't influence our assessment of those products. Please don't interpret the order in which products appear on our Site as any endorsement or recommendation from us. finder.com compares a wide range of products, providers and services but we don't provide information on all available products, providers or services. Please appreciate that there may be other options available to you than the products, providers or services covered by our service.