Personal Loan vs. Home Equity Loan: What’s the Difference?

A home equity loan lets you borrow a lump sum against the equity in your home.

A personal loan is different because it doesn't require collateral, and most personal loans offer faster approval and funding compared to home equity loans.

Keep reading to find out how to decide which is right for you.

MoneyLion offers a service to help you find personal loan offers. Based on the information you provide, you can get matched with offers for up to $100,000 from our top providers. You can compare rates, terms, and fees from different lenders and choose the best offer for you.

Key Differences Between Personal Loans and Home Equity Loans

What Is a Personal Loan?

A personal loan is a general-purpose installment loan that typically doesn't require collateral.

Unlike home equity loans, which have high minimum loan amounts, you can borrow as little as $1,000 with a personal loan. Depending on the lender and your creditworthiness, you could borrow as much as $100,000.

Term Lengths Available

Personal loans are most commonly available in terms of two to seven years. You get your loan proceeds in a single lump sum, then make monthly payments, just like with a home equity loan. Because personal loans also have fixed rates in most cases, your payment stays the same for the whole loan term.

What You Can Use a Personal Loan For

Unless your lender says otherwise, you can use a personal loan however you want. Debit consolidation and home repairs are common uses, but quick approval and funding make personal loans a potentially good choice for any emergency expense that's too large for a credit card.

Banks, credit unions and nonbank lenders all offer personal loans, which makes them easy to find.

What Is a Home Equity Loan?

A home equity loan is an installment loan you take out against the equity in your home. You can typically borrow anywhere from a minimum of $10,000 to a maximum of 80% or 85% of your home equity — that is, the portion of your home's value that you own free and clear. If you have a mortgage loan on your home, the home equity loan is a second mortgage.

Term Lengths Available

Loan terms can range from five years to 30 years, depending on the lender and how much you borrow. Your payment stays the same for the entire term because the loans typically have fixed interest rates.

What You Can Use a Home Equity Loan For

You can use a home equity loan for just about any purpose. Many borrowers use it as a relatively low-cost way to finance home improvements, education costs and other major expenses.

Keep in mind, though, that your home secures the loan, so you could lose your home if you're unable to repay it.

Banks and credit unions originate most home equity loans. You might have to shop a bit to find one, though. Many banks offering home equity products have discontinued installment loans in favor of home equity lines of credit.

How Does a Personal Loan Work?

Here's what you can expect when you take out a personal loan.

1. Apply in person or online. The lender will review your income and credit.

2. Once approved, review and sign your loan documents to finalize the loan and receive the funds.

3. Begin making your monthly payments.

How Does a Home Equity Loan Work?

Here's how a home equity loan works.

1. Apply for your loan online or in person. The lender will review your income, credit and existing mortgage loans.

2. Schedule an appraisal with the lender's appraiser. The appraisal helps the lender evaluate how much equity you have in your home.

3. After the lender approves the loan, review and sign your loan documents to finalize the loan and receive the funds.

4. Begin making monthly payments.

Pros and Cons of Each Option

Consider the pros and cons of personal loans and home equity loans as you weigh your options.

Personal Loan Pros

• No collateral needed

• Can borrow as little as $1,000

• Quick approval and funding

Personal Loan Cons

• Rates can be much higher

• Potentially high fees

• Maximum loan amount usually lower than with home equity loan

Home Equity Loan Pros

• Lower rates compared to personal loans

• Consistent, predictable payments due to fixed rate

• Potentially long loan term

• You might be able to deduct the interest on your taxes

Home Equity Loan Cons

• Home is at risk in the event of loan default

• Long loan term increases total interest and risk of default

• Might have to borrow more than you need because of loan minimums

How To Choose the Right Option for You

Comparing home equity loans and personal loans with real-world situations can help you decide which is best.

How To Apply for a Personal Loan or Home Equity Loan

The steps to apply for a home equity loan and personal loan are similar, but processing is more complicated with a home equity loan.

1. Order your credit score and a copy of your combined credit report. Resolve any issues that might keep you from being approved for the loan.

2. Research lenders, and request rate quotes from a few you like.

3. Start an application on your chosen lender's website. Follow the instructions for submitting your photo ID, recent pay stubs, W-2 or 1099 forms or both, as well as any other documents the lender asks for.

4. Watch for your approval notification. Personal loans are often approved right away. Home equity loans often take weeks or longer, especially if the appraisal is delayed.

5. Review and sign your loan documents to accept the loan.

6. Watch for your check to arrive or for the deposit to hit the account you designed to receive the loan funds. Personal loans can be funded as soon as the same day. Home equity loans could take longer.

FAQs

Which one is easier to get — a home equity loan or a personal loan?

Personal loans are faster and easier to get, but if you need a large loan, a home equity loan might be easier to qualify for because it's secured by your home.

Which has lower interest rates?

Home equity loans usually have lower rates, although some personal loan rates are very competitive for the most qualified borrowers.

Can I use either for debt consolidation?

Yes. But if you'll use a personal loan, make sure the rate is lower than rates on the debt you're consolidating.

How do they affect credit score?

The net effect is usually beneficial as long as you make your payments on time. However, you might see an initial drop because of the credit inquiry and change in the average age of your accounts.

Can I switch from one to the other later?

Although you can't convert one loan type into another, you can use one loan to refinance the other.

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