Home Equity Loan vs. Personal Loan

Choosing between a home equity loan and a personal loan usually comes down to three factors: how much you need, how quickly you need the money, and whether you are comfortable using your home as collateral.

A home equity loan lets you borrow against the value of your property. That can let you access larger loan amounts and lower interest rates.

A personal loan, on the other hand, is unsecured and typically funds much faster, though interest rates may be higher.

Understanding the differences in rates, fees, risk, and approval requirements can help borrowers choose the right option for their financial goals.

This guide focuses on fixed-rate home equity loans. If you want to learn about how HELOCs stack up against personal loans, check out our guide on that.

Understanding Home Equity Loans

A home equity loan is a lump-sum loan secured by your home. Because it uses your property as collateral, it is often referred to as a second mortgage.

Home equity represents the difference between your home’s current market value and the amount you still owe on your mortgage.

Because the loan is secured by real estate, the process may involve a property appraisal, title review, and underwriting and closing documentation. That can often take longer than an unsecured loan.

Lenders usually limit borrowing based on combined loan-to-value (CLTV), which compares your total mortgage balances to the home’s value. Many lenders allow total borrowing up to roughly 80% to 85% of the home’s value, depending on credit profile and underwriting.

You can use our CLTV calculator to get an idea of your potential borrowing capacity.

Understanding Personal Loans

A personal loan is a fixed-term installment loan that usually does not require collateral.

Approval typically depends on factors like your credit score, income, and existing debts. Personal loans are often used for debt consolidation, emergency expenses, medical bills, and smaller home improvement projects.
One of the main advantages is speed. Many lenders can approve and fund personal loans within a few days after approval.

However, because these loans are unsecured, lenders often charge higher interest rates and limit borrowing amounts. That also means your home isn’t at risk, however.

Home Equity Loan vs Personal Loan Amounts

Borrowing limits are one of the biggest differences between these two options.

Borrowers with significant home equity may qualify for much larger loan amounts with a home equity loan.

Home Equity Loan vs Personal Loan Interest Rates

Interest rates usually differ because one loan is secured and the other is not.

Because lenders can recover losses through collateral, secured loans typically carry lower interest rates.

Terms and Payment Differences

Loan term length influences both monthly payments and total interest.

Longer repayment periods can lower monthly payments but may increase total interest paid over time.

Pros and Cons of Home Equity Loans

Home equity loans generally have lower interest rates compared with many unsecured loans, as well as higher borrowing limits for large expenses. They can also come with potential tax benefits when funds improve the home securing the loan

They also come with drawbacks, however: Your home is used as collateral, the application process is often slower, and closing costs may apply.

Pros and Cons of Personal Loans

Personal loans feature fast approval and funding with no property collateral required. But they also come with higher interest rates, lower borrowing limits, and shorter repayment terms.

When to Choose a Home Equity Loan

A home equity loan may be the better choice when:

• you need a larger loan amount
  
  
• you have substantial equity in your home
  
  
• you want lower interest rates
  
  
• you can wait for a longer approval process
  
  

These loans are often used for large home improvements, major expenses, or consolidating high-interest debt.

When to Choose a Personal Loan

A personal loan may be a better option when:

• you need funding quickly
  
  
• you do not want to use your home as collateral
  
  
• the loan amount is relatively small
  
  
• you prefer a simpler application process
  

These loans are commonly used for emergency expenses, small renovations, or short-term financing needs.

The Bottom Line

The choice between a home equity loan and a personal loan often comes down to timing and your personal preferences. A home equity loan often features larger limits at lower rates, but is also secured by your home and can take longer to fund. A personal loan features faster funding, but often at higher rates, but also isn’t secured by your home.

Frequently Asked Questions

What is the difference between a home equity loan and a personal loan?

A home equity loan is secured by your home and usually offers larger loan amounts and lower interest rates. A personal loan is unsecured and typically funds faster but may have higher interest rates.

Which loan usually has lower interest rates?

Home equity loans usually offer lower rates because they are secured by property.

Can you lose your home with a home equity loan?

Yes. Because the loan is secured by your home, failing to make payments could eventually lead to foreclosure.

How quickly can I receive funds?

Personal loans can often be funded within a few days after approval. Home equity loans usually take several weeks due to appraisal and closing requirements.

When should I avoid borrowing against home equity?

You may want to avoid using home equity when you need a small amount quickly or when taking on additional mortgage debt could strain your finances.