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 because the loan is secured by your home.
A personal loan is usually unsecured and can fund faster, though interest rates may be higher because the lender does not have home collateral to reduce risk.
Understanding the differences in rates, fees, risk and approval requirements can help you choose the option that fits your 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.
Home Equity Loan vs. Personal Loan Basics
| Feature |
Home Equity Loan |
Personal Loan |
| Collateral |
Secured by your home. |
Usually unsecured. |
| Funding Type |
Lump sum. |
Lump sum. |
| Rate Type |
Usually fixed. |
Usually fixed. |
| Borrowing Limit |
Based partly on available home equity. |
Based mainly on credit, income, debt and lender limits. |
| Funding Speed |
Often slower because appraisal, title review and closing may be required. |
Often faster because no home valuation is usually needed. |
| Main Risk |
Missed payments can put your home at risk. |
Missed payments can damage your credit and lead to collection activity. |
Understanding Home Equity Loans
A home equity loan is a lump-sum loan secured by your home. The CFPB explains that a home equity loan lets you borrow money using your home equity as collateral and receive the money as a lump sum.
Home equity is 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, underwriting and closing documentation. That can take longer than an unsecured loan.
Lenders usually limit borrowing based on combined loan-to-value ratio, or CLTV. CLTV compares your total mortgage balances with the home’s value. Many lenders allow total borrowing up to roughly 80% to 85% of the home’s value, depending on credit profile, property type, income, debt and lender requirements.
You can use a CLTV calculator to estimate your potential borrowing capacity before applying. A lender will still need to review your home value, mortgage balance, credit, income and other details to determine your actual loan amount.
Understanding Personal Loans
A personal loan is a fixed-term installment loan that usually does not require collateral.
Approval typically depends on factors such as your credit score, income, existing debts, requested loan amount and repayment term. 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 personal loans can be approved and funded faster than home equity loans because they usually do not require a home appraisal, title review or mortgage-style closing.
Because personal loans are usually unsecured, lenders often charge higher interest rates and limit borrowing amounts. The trade-off is that your home is not used as collateral.
Home Equity Loan vs. Personal Loan Amounts
Borrowing limits are one of the biggest differences between these two options. Home equity loans can allow larger loan amounts when you have enough equity, while personal loans are usually capped by lender limits and your credit profile.
| Feature |
Home Equity Loan |
Personal Loan |
| Borrowing Capacity |
Often larger if you have enough home equity. |
Often smaller, depending on lender limits and credit profile. |
| Collateral |
Secured by your home. |
Usually unsecured. |
| Approval Factors |
Credit, income, debt, home value, mortgage balance and available equity. |
Credit, income, debt, requested amount and lender requirements. |
Home Equity Loan vs. Personal Loan Interest Rates
Interest rates often differ because one loan is secured and the other usually is not. Secured loans require collateral, which the lender can use to recover losses if the borrower does not repay. Unsecured loans do not require collateral, so lenders often price in more risk. The CFPB explains that secured loans require collateral, while unsecured loans do not.
| Cost Factor |
Home Equity Loan |
Personal Loan |
| Rate Pattern |
Often lower than unsecured loans because the loan is secured by your home. |
Often higher because the loan is usually unsecured. |
| Fees |
Closing costs may apply. |
Origination fees may apply. |
| Risk Trade-Off |
Lower rate potential, but your home is collateral. |
No home collateral, but rate may be higher. |
Your exact rate depends on the lender, loan amount, repayment term, credit profile, income, debt and market conditions.
Terms And Payment Differences
Loan term length affects both monthly payments and total interest. Longer repayment periods can lower monthly payments, but they may increase total interest paid over time.
| Feature |
Home Equity Loan |
Personal Loan |
| Repayment Term |
Often longer than a personal loan. |
Often shorter than a home equity loan. |
| Monthly Payments |
May be lower because the loan can be spread over more years. |
May be higher because repayment terms are often shorter. |
| Total Interest |
Can be higher over a long term, even if the rate is lower. |
Can be easier to estimate because the term is usually shorter and fixed. |
Compare the payment and the total cost. A loan with the lower monthly payment is not always the lower-cost loan.
Pros And Cons Of Home Equity Loans
Home equity loans generally have lower interest rates than many unsecured loans and may allow higher borrowing limits for large expenses. They can also come with potential tax benefits when funds are used to improve the home securing the loan.
The drawbacks are important. 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 can offer faster approval and funding because they usually do not require property collateral. They also provide fixed payments and do not put your home directly at risk.
The trade-off is that personal loans often have higher interest rates, lower borrowing limits and shorter repayment terms than home equity loans.
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 a fixed rate and predictable payment
- You are comfortable using your home as collateral
- You can wait for a longer approval and closing process
Home equity 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
- You do not have enough home equity to qualify for a home equity loan
Personal loans are commonly used for emergency expenses, small renovations or short-term financing needs.
Can Home Equity Loan Interest Be Tax Deductible?
Home equity loan interest may be deductible when funds are used to buy, build or substantially improve the home securing the loan, subject to IRS rules and your tax situation. IRS Publication 936 explains that interest on home equity loans and lines of credit is deductible only when the borrowed funds are used for those qualifying purposes.
Interest generally is not deductible if you use home equity loan funds for personal expenses such as credit card debt, vacations, tuition or medical bills. Keep records showing how you used the funds if you plan to claim a deduction.
The Bottom Line
The choice between a home equity loan and a personal loan often comes down to timing, loan size and risk tolerance. A home equity loan can offer larger limits and lower rates, but it is secured by your home and can take longer to fund.
A personal loan can fund faster and does not use your home as collateral, but it often comes with higher rates and lower borrowing limits. Compare the rate, term, fees, monthly payment and total cost before choosing.
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 usually unsecured and may fund faster, but it often has higher rates and lower borrowing limits.
Which Loan Usually Has Lower Interest Rates?
Home equity loans usually offer lower rates because they are secured by property. Your actual rate depends on your credit profile, income, debts, loan amount, term and lender requirements.
Can You Lose Your Home With a Home Equity Loan?
Yes. Because the loan is secured by your home, failing to make payments could lead to foreclosure.
How Quickly Can I Receive Funds?
Personal loans may fund within days after approval, depending on the lender. Home equity loans usually take longer because they may require an appraisal, title review, underwriting and closing.
When Should I Avoid Borrowing Against Home Equity?
You may want to avoid using home equity when you need a small amount quickly, do not have a stable repayment plan or would be financially strained by adding another payment secured by your home.
Is a Home Equity Loan Better Than a Personal Loan?
It depends on your goal. A home equity loan may be better for larger expenses and lower-rate borrowing when you have enough equity. A personal loan may be better for faster funding, smaller expenses or borrowers who do not want to use their home as collateral.
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