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

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

By Jessica Leshnoff • May 28, 2020

If you’re contemplating some long-awaited home improvement projects or are looking for ways to pay emergency bills, you may be trying to figure out the best way to get the extra money you need.

A credit card or savings account may work for minor renovations or a few small bills, but for more significant expenses, a personal loan or home equity loan might better suit your needs. But what’s the difference between these loans and which could be the best option for you? From definitions to pros and cons of each, we take some time to explore home equity loans vs. personal loans below.

What is a personal loan?

Featuring fixed payments and a fixed interest rate, a personal loan is a type of installment loan you can use for a variety of reasons, including debt consolidation, home improvement projects and emergencies. They can either be secured or unsecured loans, but all feature predictable monthly payments over a scheduled period of time.

What is a home equity loan?

Like personal loans, home equity loans are also installment loans. Sometimes called “home improvement loans,” because homeowners often use them to finance household renovations, they use your home as collateral. (If you’re unfamiliar with the concept of collateral, check out this primer on what collateral is and how it works.)

While popular for home improvement projects, it’s important to note that, like personal loans, home equity loans can be used for whatever you’d like, including college tuition, medical bills and to pay off high-interest debt.

How does a home equity loan work?

You need more than a home to qualify for a home equity loan. You need home equity, which is simply the difference between what you currently owe on your mortgage and the current value of your home.

For example, say you bought your home for $200,000, and, according to an appraisal (something you’ll likely need for a home equity loan), it’s now worth $250,000. If you’ve already paid $50,000 of your mortgage, you have $100,000 in equity.

Using your home as collateral, you can now borrow against that equity. It’s important to note that lenders typically limit these loans to 85% of your home’s equity.1

What’s the difference between a home equity loan and a personal loan?

While there are certainly differences between home equity loans and personal loans, let’s start with similarities. As we mention above, personal loans and home equity loans are both installment loans. You get your money in one lump sum and pay off your loan in pre-established monthly installments over a set amount of time. You can also use either loan for a variety of reasons.

As for the differences between these loans, here are the most notable distinctions:

  • While personal loans can either be secured or unsecured, home equity loans – since they use your home as collateral – are always secured. This means that if you fail to pay your home equity loan, you could lose your home.

  • Since home equity loans are secured with high-value collateral, i.e. your home, personal loans are often smaller than home equity loans.

  • Interest rates are typically higher for personal loans than they are for home equity loans. The terms of a personal loan — including interest rate — are based on a variety of factors, including credit history, income, expenses and the availability and value of collateral (if applicable), not just whether or not you’re a homeowner.

  • While the personal loan process can take a matter of days, sometimes even just hours, the home equity loan process typically takes about two to four weeks.2

  • While some personal loans require an origination fee – a one-time fee to cover loan processing costs – all home equity loans involve a number of closing costs. Many of these, such as title searches and notary fees, are similar to costs you may have paid when taking out your initial mortgage.3

  • When banks respond to changing economic conditions, they might also change their policies on issuing home equity loans.4 Because of this, it may be easier, and faster, to seek out a personal loan.

Is a home equity loan or a personal loan the right option?

This really depends on your circumstances. If you need a large amount of money for a major home improvement project, cash to pay unexpected emergencies or to help finance your child’s college education, and have a significant amount of equity built up, a home equity loan may be the way to go.

If you don’t require a large loan – perhaps you’re interested in household bill consolidation, or have a smaller home improvement project you’d like to check off your list – a personal loan may better suit your needs. An unsecured personal loan is also a great option if you’d like to avoid securing your loan with collateral or you have a more immediate need for money.

Take time to consider your options

Is it better to get a home equity loan or personal loan? Do your research, then give yourself enough time to weigh your options. Whether it’s home renovations or paying off bills, when you find the right loan, and the right lender, you’re one step closer to achieving your goals.

1. Federal Trade Commission. “Home Equity Loans and Credit Lines.” (accessed May 15, 2020).
2. Lock, Cheryl. “What You Need to Know about Home Equity Loans.” (accessed May 18, 2020).
3. Linton, Alaya. “How Much Are Home Equity Loan Closing Costs?” (accessed May 18, 2020).
4. American Banker. “JPMorgan halts home equity loans due to coronavirus.” (accessed May 19, 2020).

The information in this article is provided for general education and informational purposes only, without any express or implied warranty of any kind, including warranties of accuracy, completeness or fitness for any particular purpose. It is not intended to be and does not constitute financial, legal or any other advice specific to you the user or anyone else. The companies and individuals (other than OneMain Financial’s sponsored partners) referred to in this message are not sponsors of, do not endorse, and are not otherwise affiliated with OneMain Financial.