Home Equity Loan vs. Debt Consolidation: Key Differences

Home equity loans and debt consolidation loans can both help you combine high-interest debt into a single payment, but they come with very different risks. A home equity loan may save more on interest, while a debt consolidation loan can offer greater flexibility and less risk.

Here's what to consider before choosing between the two.

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Key Takeaways

• When comparing home equity loans vs. debt consolidation, collateral is the dividing line. A home equity loan is secured by your house, while most debt consolidation loans are unsecured personal loans.

• A home equity loan usually carries a lower rate, recently around 8%. Debt consolidation loans average roughly 11% to 12%, but they don't put your home on the line.

• Defaulting on a home equity loan can lead to foreclosure. Missing payments on an unsecured consolidation loan can trigger collections or a lawsuit, not the loss of your home.

• Home equity loans take longer and cost more upfront. Funding can run 2 to 8 weeks with closing costs, versus a few business days for a personal loan.

• Choose based on home ownership, risk tolerance and payoff timeline. Lean home equity for lower long-term interest, or a consolidation loan for speed and less risk.

Summary generated by AI, verified by MoneyLion editors

Home Equity Loan vs. Debt Consolidation: At a Glance

The following table has a side-by-side look at how the loans compare.

What’s the Difference Between These Two Loans?

A home equity loan, sometimes called a second mortgage, is a mortgage loan against your home equity, and it uses your home as collateral. A debt consolidation loan is usually a personal loan that doesn’t require collateral.

Here are quick facts about home equity and debt consolidation loans:

• You receive both loan types as lump sums, and you repay both in monthly installments, usually with a fixed interest rate.

• Both loans replace existing debt with a new debt.

• Home equity loans usually have lower rates because your home serves as collateral, but in return, you could lose your home if you default on the loan.

• Debt consolidation loans often have higher rates, but you typically pay them off faster.

How the Costs Compare

Home equity and debt consolidation loans are very different loan types, so the costs you pay differ as well.

What’s at Risk With Each Option?

Home equity loans are riskier than debt consolidation loans because you face foreclosure if you default, but both can also affect your credit depending on how you manage the new debt.

The risk of a debt consolidation loan is the same as for most types of credit – if you don’t pay, the creditor can send your account to collections, and eventually sue you to collect. 

Both loans have an additional risk. Unless you resolve the issues that resulted in your debt, you could run your credit cards up again. If that happens, you’ll have both the consolidated debt and the new debt to contend with.

If risk is a factor in your decision about which type of loan to choose:

• Choose a home equity loan if you’re comfortable with the risk.

• Choose a debt consolidation loan if you don’t own a home or don’t want to risk it.

Which One Is Right for You?

The best choice for you depends in large part on whether or not you own a home and how comfortable you are with risking foreclosure, but it also depends on whether debt consolidation is a good idea for your budget and timeline.

Other Options Worth Knowing About

Using a home equity loan or debt consolidation loan may be a good choice for many people, but it’s not your only option if you’re comparing other ways to consolidate debt. Here are others to consider.

Debt Management Plan (DMP)

• A nonprofit credit counselor might be able to negotiate with your creditors to reduce your credit card interest rates and late fees.

• You can then make one payment each month to the credit counselor, who will disburse the payments to your creditors. 

• You’ll have to close any credit cards you enroll and refrain from opening new cards while you’re in the program.

Debt Settlement

• Instead of paying your debt bills, you make monthly payments into a savings account set up by a debt settlement company.

• The company uses that money to negotiate with your creditors to settle your debts for less than you owe.

• As with a DMP, accounts enrolled in debt settlement will be closed.

• Because the long period of nonpayment on existing accounts will likely have a serious negative impact on your credit and pose financial and legal risks, debt settlement is often considered a last resort before bankruptcy.

Balance Transfer Credit Card

• A balance transfer credit card offers a promotional interest rate, usually 0%, on balances you transfer from other credit cards.

• The promotional rate typically lasts between 12 and 18 months, which gives you time to make a big dent in your debt or pay it off entirely before the regular interest rate goes into effect.

• The downsides are that you need very good credit to get one, and a late payment can void your promotional rate.

• Most cards charge a fee of 3% to 5% of the transferred amount.

How To Apply for Either Loan

A home equity loan application is more complicated than an application for a debt consolidation loan. But you’ll follow the same basic steps for either loan type.

• Step 1: Make a list of the debts you want to consolidate, their account numbers and their payoff amounts. 

• Step 2: Calculate how much you need to borrow, and decide on a loan term. Remember to include loan fees and closing costs if you’ll roll them into the loan. 

• Step 3: Compare loan quotes from several lenders. Look at their annual percentage rates (APRs), repayment terms, monthly payment amounts and loan fees. Also consider the total interest you’ll have paid by the time you’ve repaid the loan. 

• Step 4: Gather the documents you’ll need for your application and review what lenders look for before you apply. This typically includes a government photo ID and proof of income, such as pay stubs, bank statements, W2s, 1099s and tax returns.

• Step 5: Have your personal and financial information handy when you apply. You’ll need your Social Security number, employer’s contact information and your gross monthly income, plus the account number of the bank account you want to receive the loan funds. If you’re applying for a personal loan, you might be able to have the lender pay your debt accounts directly, so be prepared to provide that information as well.

• Step 6: Apply for a loan from your preferred lender. Most lenders let you do that online, over the phone or, if the lender has a physical location, in person.

• Step 7: Watch for lender requests for more information while your application is being considered, and respond as quickly as you can. 

• Step 8: Once your loan has been approved, read the terms carefully before accepting. You can often finalize a consolidation loan online or in person. You’ll do it at closing for a home equity loan.

Bottom Line

The decision between a home equity loan and debt consolidation loan is a tough one. Consider the following as you weigh your options.

• A home equity loan usually has a lower interest rate, but it can cost more in the long run if you stretch out the payments over 20 or 30 years.

• Home equity loans typically have more loan fees, and approval and funding can take up to two months.

• A debt consolidation loan usually has a higher rate, but shorter terms are available.

• Lenders often approve and fund debt consolidation loans within a few days, and they don’t require collateral.

FAQs

Here’s more information to help you decide which loan type is best for you.

Is a home equity loan better than a debt consolidation loan?

It can be if you have a high tolerance for risk and a large amount of debt you need to stretch out over many years.

Does a home equity loan hurt your credit score?

It can. The hard inquiry on your credit report can lower your score slightly. You might see larger decreases due to the new loan reducing the average age of your accounts and increasing your credit utilization.

What credit score do you need for a debt consolidation loan?

Every lender has its own requirements, so there’s no single minimum score. However, you have a better chance of approval with a score in the mid-600s.

Can I use a home equity loan to pay off credit card debt?

Yes. Rates are typically much lower than credit card rates, so as long as you don’t stretch payments out for too long, a home equity loan can save you a lot of money on interest.

What happens if I can't make payments on a home equity loan?

Defaulting on the loan could result in foreclosure.

How long does it take to get approved for a debt consolidation loan?

Some lenders offer same-day approval, and many can approve applications within several business days.

Key Terms

• Home equity loan: A lump-sum second mortgage secured by your home, repaid in fixed monthly installments. Because your home is collateral, defaulting can put you at risk of foreclosure.

• Debt consolidation loan: Usually an unsecured personal loan used to combine multiple debts into one fixed monthly payment, with no collateral required.

• Collateral: An asset, such as your home, that a lender can take if you don't repay. Secured loans use collateral; unsecured loans don't.

• Closing costs: Upfront fees on a home equity loan, often including origination, appraisal and title charges, that a personal loan usually avoids.

• Balance transfer: Moving credit card debt to a new card with a temporary low or 0% rate. Most cards charge a 3% to 5% transfer fee.

• DMP: A nonprofit credit counselor negotiates lower rates and fees, and you make one monthly payment to the counselor who pays your creditors.

Summary generated by AI, verified by MoneyLion editors

Sources

• Consumer Financial Protection Bureau. 2023. "What do I need to know about consolidating my credit card debt?"

• Federal Trade Commission. "Home Equity Loans and Home Equity Lines of Credit."

• Federal Reserve. 2026. "Consumer Credit - G.19."

• Consumer Financial Protection Bureau. 2024. "What is a home equity loan?"

Information is accurate as of June 12, 2026.

Photo credit: Chainarong Prasertthai /iStock