Do You Need A Home Equity or Personal Loan For Extra Funds?

It's Important To Explore All Options To Make The Best Decision

Updated: March 7, 2024 by Steven P

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Getting a loan is one way to cover unexpected costs or large expenditures like a home renovation, school tuition, or a down payment on an investment property.

But there are many types of loans that can help achieve these goals, including home equity loans and personal loans. While both of these options can offer you a lump sum of cash, the two aren’t interchangeable. One is more suited for smaller loan amounts, is easier to qualify for, and may cost you more. The other offers larger sums, lower rates, and longer loan terms.

Home Equity Loans vs. Personal Loans

Home equity loans and personal loans are two ways you can borrow cash. With a home equity loan, you borrow against the equity you have in your house (the part you actually own) in exchange for a lump sum. These loans are usually issued by banks, credit unions, and mortgage lenders.

Personal loans, on the other hand, require no collateral (i.e., an asset a lender accepts as security for extending a loan) and are available through most financial institutions and lenders.

“Personal loans are available to people who don’t own a home,” says Barry Rafferty, senior vice president of capital markets at Achieve. “Instead of home equity, lenders make decisions based on income, credit history, and debt-to-income ratio.”

In both cases, borrowers get an upfront lump sum, plus fixed interest rates and consistent monthly payments over the life of the loan.

Despite their similarities, though, home equity loans and personal loans aren’t one and the same. See the key differences between these two types of loans below.

Key Differences Between Home Equity Loans and Personal Loans

1. Collateral Requirement
- Home equity loans require collateral, typically in the form of your home's equity.
- Personal loans do not require collateral; instead, they are based on factors such as income, credit history, and debt-to-income ratio.

2. Loan Amounts
- Home equity loans often allow for larger loan amounts since they are based on the equity in your home.
- Personal loans typically offer smaller loan amounts compared to home equity loans.

3. Interest Rates
- Interest rates on home equity loans tend to be lower compared to personal loans because they are secured by your home.
- Personal loans usually come with higher interest rates since they are unsecured.

4. Loan Term
- Home equity loans typically have longer loan terms, allowing borrowers to spread payments over a more extended period.
- Personal loans often have shorter loan terms, resulting in higher monthly payments but faster repayment.

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Choosing Between Home Equity Loans and Personal Loans

When deciding between a home equity loan and a personal loan, consider your financial situation, borrowing needs, and long-term goals.

If you own a home and need to borrow a significant amount of money for a specific purpose, a home equity loan may offer lower interest rates and longer repayment terms.

However, if you don't own a home or need a smaller loan amount, a personal loan could be a more accessible and flexible option.

Before applying for either type of loan, it's essential to compare offers from multiple lenders, understand the terms and conditions, and calculate the total cost of borrowing, including interest and fees.

In conclusion, both home equity loans and personal loans can be valuable financial tools depending on your circumstances. By understanding the key differences between the two, you can make an informed decision that aligns with your financial goals and priorities.

If you have any questions or need assistance in choosing the right loan option for you, don't hesitate to reach out to Nook, the Philippines' first mortgage broker, for personalized guidance and support.

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