Home Equity Loan vs. Personal Loan: Which Should You Take?

Both home equity loans and personal loans can help you access the funds you may need for a large expense, but they come with different costs, risks and eligibility requirements. A home equity loan uses your house as collateral and may offer lower interest rates, while a personal loan is unsecured and typically easier to access, especially if you have good credit. Choosing the appropriate loan depends on your financial goals, credit profile and risk tolerance.

A financial advisor can help you weigh the pros and cons of different loans so you can determine which option fits your situation.

What Is a Home Equity Loan?

A home equity loan allows you to borrow against the equity in your home. Equity is the difference between what your home is worth and what you still owe on your mortgage. Lenders typically allow you to borrow up to 80% to 85% of your equity, minus your outstanding mortgage balance.

Home equity loans are secured loans, meaning your house acts as collateral. In return, you usually receive a lower fixed interest rate and a predictable monthly payment over a set term, often five to 30 years. These loans are commonly used for home improvement projects, college tuition or debt consolidation.

What Is a Personal Loan?

A personal loan is usually an unsecured loan that does not require any collateral. Instead, your credit score, income and overall financial history determine your eligibility and loan terms. These loans typically range from $1,000 to $100,000, although some lenders may vary in their amounts.

Because personal loans do not require property as backing, they often come with higher interest rates than home equity loans. However, the application process tends to be faster and simpler. You can use the funds for nearly any purpose, including emergency expenses, weddings, vacations or consolidating credit card debt.

Key Differences Between a Home Equity Loan vs. Personal Loan

The biggest difference between a home equity loan vs. personal loan is collateral. A home equity loan is secured by your house, while a personal loan is unsecured. This affects the interest rate, loan amount, approval process and consequences of default.

These are the key differences to consider as you make your decision. 

• Collateral requirements. Home equity loans require you to pledge your home as security, but personal loans do not.
  
• Interest rates. Home equity loans generally have lower interest rates because they are secured. Personal loan rates are often higher, especially if your credit score is below 700.
  
• Funding speed. You typically receive approval and funding within a few days for personal loans. In contrast, home equity loans can take several weeks and require appraisals, title checks and more paperwork.
  
• Tax deductibility. Interest on home equity loans may be tax-deductible if used for qualifying home improvements. Personal loan interest is not tax-deductible.

When a Home Equity Loan Might Be the Better Choice

If you need to borrow a large amount and have significant home equity, a home equity loan might be your better option. 

Say you need $60,000 to remodel your kitchen. If your home is worth $400,000 and you owe $250,000 on your mortgage, you may be able to borrow up to $80,000 with a lower interest rate than a personal loan.

Home equity loans also offer fixed interest rates, which can help you budget for consistent monthly payments over time. They are often a good fit for long-term projects or expenses when you want predictability and lower financing costs.

However, the risk is significant: if you fail to repay the loan, you could lose your home. That makes this option best for borrowers with a stable income and clear repayment strategy.

When a Personal Loan Might Be the Better Fit

A personal loan may be a better fit if you need funds quickly or do not want to risk your home. For instance, if you need $10,000 for a medical emergency and have strong credit, you may qualify for a personal loan with minimal paperwork and same-day approval.

Personal loans are ideal for short-term borrowing needs, such as consolidating smaller debts, funding a wedding or covering unexpected bills. The lack of collateral reduces your risk if your financial situation changes, although you will likely pay a higher interest rate.

This option works well for renters, individuals with little home equity or anyone who values speed and flexibility over the lowest possible rate.

Risks and Considerations

With both loan types, it is important to weigh the risks.

• Home equity loans. You risk foreclosure if you default. There are also closing costs and appraisal fees, as well as a longer approval process.
  
• Personal loans. You could face steep interest charges if your credit is not excellent. Some lenders also charge origination fees or prepayment penalties.

Additionally, borrowing large amounts on either type of loan can impact your debt-to-income ratio, potentially limiting your ability to qualify for future financing or mortgages.

Which Option Costs More Over Time?

To see how costs compare, let’s look at a simplified example.

For example, if you were to borrow $30,000, there is a significant difference in cost.

In this scenario, the personal loan costs you $7,508 more in total interest. However, the quicker approval and lack of collateral may be worth the tradeoff, depending on your goals.

You can use a loan calculator to model different loan amounts, interest rates and terms or consider consulting a financial advisor for personalized guidance tailored to your specific financial goals.

Bottom Line

Both home equity loans and personal loans have their advantages. A home equity loan typically offers lower interest rates and higher borrowing limits, but it also uses your home as collateral. A personal loan, on the other hand, is easier to qualify for and doesn’t put your property at risk, though it often comes with higher rates and smaller loan amounts.

When deciding between the two, consider how much you need to borrow, how quickly you need the funds and whether you’re comfortable using your home to secure the loan.

“If you have significant home equity, a home equity loan might be a cheaper borrowing option. When shopping for any type of loan, it’s smart to get quotes from at least three different lenders,” said Certified Financial Planner™ Tanza Loudenback. “Even if you’re seeking a home equity loan and have an existing mortgage, you don’t need to go through your current lender if its loan terms aren’t the best you’ve been offered.”

Financial Planning Tips

• A financial advisor can help you create a clear savings plan for different goals. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
• If you want to build your savings up consistently, consider setting up automatic transfers from your checking to your savings accounts. This approach could help you make saving a routine part of your financial life.

Tanza Loudenback, a Certified Financial Planner™ (CFP®), provided the quotes used in this article. Please note that Tanza is not a participant in SmartAsset AMP, is not an employee of SmartAsset and has been compensated. The opinions voiced in the quote(s) are for general information only and are not intended to provide specific advice or recommendations.

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