Personal Loan vs. Home Equity Loan: What is the Difference?

Both Personal loans and home equity loans are one-time payments made to borrowers, who are required to repay in installments within a specified period. However, the two types of loans have major differences. For instance, to obtain a home equity loan, you will need to use your house as collateral. On the other hand, a personal loan can be obtained even without collateral, but some lenders require borrowers to provide security.

Do you want to learn other key differences between home equity loans and personal loans? If so, continue reading this article.

Loan Purpose and Structure

As mentioned, your house serves as collateral when borrowing a home equity loan. But what is home equity? Simply put, it is the difference between the remaining balance on your mortgage and the amount you could receive if you sold your property.

While most personal loans don’t require collateral, those that do are backed by things like cars, stocks, savings, or a certificate of deposit. Borrowers can use personal loans for various purposes, such as to pay off high-interest debt, consolidate credit card debt, and make large purchases like a home appliance.

Similarly, home equity loans can serve several purposes, including debt consolidation and settling medical or educational expenses. Remember that home equity loans are lump-sum payments. Therefore, they might not be suitable for a situation like a lengthy renovation project, where you will need ongoing funding for a certain time period. In such a scenario, opt for a home equity line of credit.

Loan Application and Approval

Personal Loan

Lenders of personal loans usually take these factors into consideration before approving your loan:

• Your employment and income status.
• Your credit report and credit score.
• Collateral. That’s if you want a secured personal loan.
• Any outstanding debt.

It is worth mentioning that the length of your loan term and the borrowed amount are crucial factors that lenders consider when imposing an interest rate. Personal loans have a repayment period of about five years, and the maximum amount you can borrow is $100,000.

There are fees that are attached to personal loans. They include late penalty fees, credit insurance, non-filing insurance, credit insurance, and disability insurance.

Depending on the selected lender, it can take up to seven working days for your personal loan to be processed.

Home Equity Loan

When applying for a home equity loan, your lender calculates your combined loan-to-value ratio or loan-to-value ratio to determine the amount you can borrow. The calculation is intended to determine if your house can cover the borrowed amount in case it is sold. Moreover, your loan-to-value ratio determines the interest rate to be charged. The lower the ratio, the lower the interest rate.

Keep in mind that the loan amount a lender can give you equals roughly 85% of your home equity.

Payment Terms and Interest Rates

Lenders of personal loans charge both variable or fixed interest rates, which are usually lower than those of credit cards but higher than those of home equity loans. A personal loan interest rate ranges from 6% to 35%. If your credit history is good, you are likely to obtain a loan at a considerably low interest rate.

As mentioned earlier, the repayment period for personal terms can be up to five years. However, if you want to pay low interest, it is recommended that you go for a short loan term.

Home equity loans have fixed interest rates, which are lower than those of credit cards and personal cards because your house is utilized as collateral. The biggest downside is that if you fail to repay your loan, the lender has the power to sell your home to settle the remaining balance.

Interest rates charged on home equity loans usually range from 2% to 12%. The rate you pay depends on your home equity and the length of the loan term, which can be up to thirty years.