When comparing a home equity loan vs personal loan, it can be tough to know which one is best for your financial needs. Both options offer ways to borrow money, but they differ in structure, purpose, and requirements. Choosing the right one can make a big difference in your financial health and peace of mind.
Understanding these two types of loans can help you make the best choice whether you’re looking at debt consolidation, financing home improvements, or covering a large unexpected expense.
What Is a Home Equity Loan?
A home equity loan allows you to borrow against the equity in your home, which is the difference between your home’s market or appraised value and your outstanding mortgage balance. You receive a lump sum or withdrawn amount of money and repay it over time with interest.
Because you use your home as collateral, these loans often offer lower interest rates than unsecured personal loans. However, your home is at risk if you can’t make the monthly payments.
Types of Home Equity Loans
There are two main types of home equity loans, including fixed-rate loans and home equity lines of credit, also known as HELOCs. A fixed-rate home equity loan provides a one-time disbursement of funds that you repay over time with a consistent interest rate and fixed monthly payments. This type of loan is ideal if you know exactly how much money you need and prefer the predictability of regular payments.
In contrast, a HELOC is a revolving line of credit that allows you to borrow money as needed, up to an approved limit, during a set draw period. HELOCs typically come with variable interest rates, meaning your payments can fluctuate over time depending on market conditions. However, many of the best home equity loan providers now offer fixed-rate terms.
This option is better suited for ongoing projects or situations where expenses may occur in stages, such as extended home renovations.
Key Features
If you’re considering a home equity loan, it’s important to understand the features that make it unique from other loan types. These loans are secured by your home and can offer significant financial benefits if used wisely.
- Based on equity in your home
- Typically requires a home appraisal or online valuation
- Lower interest rates due to collateral
- Fixed or variable repayment terms
- Interest may be tax deductible if used for home renovations (consult a tax expert)
Excellent Uses
Home equity loans are best used for major expenses that have long-term value or financial payoff. Because you’re borrowing against your home, these loans should be reserved for strategic, high-value purposes.
- Major home improvements
- Debt consolidation (especially if you have high-interest credit card balances)
- Emergency medical expenses
- College tuition
What Is a Personal Loan?
A personal loan is an unsecured loan that doesn’t require any collateral. It’s ideal for borrowers with good credit scores who want fast funding for various personal needs. Because it’s not tied to your home, there’s no risk of foreclosure should you fall behind in repayments.
Funds can usually be used for almost anything, from travel to home improvements, making personal loans a highly flexible borrowing option. The best personal loan providers often offer several types of personal loans, depending on how you plan to use the funds.
Types of Personal Loans
There are several kinds of personal loans designed to meet different borrower needs. A secured personal loan is backed by an asset, such as a vehicle or savings account, which the lender can claim if you default. These loans may offer lower interest rates since they pose less risk to the lender.
Unsecured personal loans are more common and don’t require any collateral. Approval is based largely on your credit history and credit scores, and they typically come with higher interest rates than secured options.
Finally, debt consolidation loans are a specialized form of personal loan used to combine multiple existing debts, such as credit cards and personal loans, into a single payment, ideally with a lower rate.
Key Features
Personal loans are known for their flexibility and ease of access for borrowers with a wide range of credit scores. However, those with higher credit scores generally get the best rates and terms. Here are the defining characteristics of most personal loans.
- No collateral required
- Fixed interest and repayment terms
- Smaller loan amounts compared to home equity loans
- Fast approval and funding
- Higher interest rates depending on credit
Excellent Uses
Personal loans can be helpful in many situations, especially for short-term or immediate needs. They’re most effective when used for specific, manageable expenses.
- Emergency expenses
- Consolidating credit card debt
- Small or medium-sized home renovations
- Wedding or large purchase funding
| Feature | Personal Loan | Home Equity Loan |
| Funding | Fast approval, funds in days | Hours to weeks. Based on your home’s equity |
| Interest | Higher; based on credit scores | Lower; backed by home as collateral |
| Repayment | Fixed monthly payments | Fixed or variable payments, depending on loan type |
| Best For | Smaller needs, quick cash, flexibility | Large expenses like home improvements |
| Fees | May include origination fees | Often includes closing costs and appraisal |
Related Article: Personal Loan Vs. Personal Line of Credit
Home Equity Loan Vs Personal Loan: Pros and Cons
Personal Loan Pros
- Fast access to cash
- No risk to your home
- No home appraisal required
- Suitable for many purposes
Personal Loan Cons
- Higher interest rates
- Lower borrowing limits
- Interest rate not tax deductible (IRS.gov)
Home Equity Loan Pros
- Lower interest rates
- Interest may be tax deductible for home use
- Larger loan amounts
- Long repayment terms
Home Equity Loan Cons
- Uses your home as collateral
- May have high closing costs
- Slower application process
Which Is Best for You?
Deciding between a home equity loan and a personal loan depends on your overall financial situation, how much money you need, and how quickly you need it. Both loan types are usable for many of the same purposes, including home renovations, consolidating debt, covering medical expenses, or financing a large purchase or event.
The key differences lie in how the loan is secured, the interest rate, and how long the approval process may take. Check out the following guidelines to determine which might be best for you.
Use a Personal Loan if:
- You need funds quickly
- You don’t want to risk your home
- You’re borrowing a smaller amount
- Your credit history is strong
Use a Home Equity Loan if:
- You need to borrow a large amount
- You’re making home improvements
- You want a lower interest rate
- You’re consolidating multiple debts
Best Home Equity Loans by State:
Discover the Best Home Equity Loans in Arizona
The Best Home Equity Loans in Michigan
Top 5 Home Equity Loans in Texas
Credit Score Impact Considerations
Both loans affect your credit scores but in different ways. A personal loan depends entirely on your credit history for approval and terms. A home equity loan may be easier to get if your credit is average, provided you have sufficient equity.
Both will require taking a hard inquiry on your credit report when you formally apply. However, many lenders offer soft-credit-check prequalifying on both loan types. On-time payments help build your credit with either option.
What to Watch Out For
- HELOCs may have fluctuating rates that increase over time
- Missing payments on a home equity loan can result in foreclosure
- Personal loans generally have higher APR and origination fees, especially for those with poor credit
- Borrowing more than needed can lead to long-term debt
Home Equity Loan Vs Personal Loan: Bottom Line
When considering a home equity loan vs personal loan, start by evaluating how much you need, your timeline, and your willingness to use your home as collateral. Consider how the monthly payments will affect your budget, and compare all fees and interest terms.
Always shop around to find the best terms, whether you need a line of credit, a lump sum, or a longer repayment plan.
Which Are the Best Providers?
Credible
Credible is an excellent marketplace platform for comparing top personal loan offers from multiple lenders with competitive rates and fast approvals. The company partners with established lenders and allows you to view prequalified rates in minutes without affecting your credit score.
The platform is exceptionally user-friendly and provides clear comparisons of terms, interest rates, and fees, helping you choose the loan that best fits your financial needs. Whether you’re looking to consolidate debt or fund a major purchase, Credible can simplify the process and potentially save you money by helping you find the lowest available rate.
LendingTree
LendingTree is an excellent marketplace source that allows you to compare home equity loans, HELOCs, and other types of loans. The platform connects borrowers to a large network of lenders, providing you access to multiple offers quickly and easily. It tops the list of our best home equity product providers.
LendingTree’s online tools make it simple to evaluate interest rates, loan terms, and closing costs side by side. For home equity products, both fixed-rate loans and variable-rate HELOCs are available to fit different financial needs. Whether you’re tapping into your home’s equity for home improvements or consolidating high-interest debt, LendingTree can help you find a competitive loan tailored to your situation.
