Comparing Home Equity Loan and Personal Loan
Personal loans are a fantastic option if you need money quickly, but your credit needs to be solid or excellent to get the best rates and terms. Although home equity loans may be easier to qualify for and provide lower rates if you have a lower credit score, they also need more time to apply for and utilize your property as collateral.
Depending on the situation, a personal loan or a home equity loan may be the best solution. In this article, we compare the features and benefits of both home equity loans and personal loans, so you can make the best decision for your financial needs.
What Are Home Equity Loans and Personal Loans?
Here’s a brief difference between a personal loan vs. home equity loan. Personal loans are short-term loans that do not require any collateral. These types of loans are unsecured, meaning the lender is taking a greater risk than with a home equity loan. Thus, personal loans often come with higher interest rates and shorter repayment terms.
Applications for personal loans are frequently submitted online, and the information required to process them is often minimal. To get the greatest rate, it’s best to shop around at different lenders.
A home equity loan, on the other hand, is where the equity you’ve built in your home is securing the loan. You’ll be utilizing your home as collateral. Generally, these loans are for homeowners who have a good amount of equity in their homes;
However, some lenders also offer home equity loans even for borrowers who have no equity in their homes. Home equity loans typically feature lower interest rates and more favorable repayment terms than other types of loans.
In terms of the application process for a personal loan vs. home equity loan, the latter is more extensive. Although applications are increasingly accepted online, the entire procedure may take several weeks. This is due to the need for a property evaluation.
Comparing Interest Rates and Fees
When comparing personal loan vs. home equity loan, one of the most important factors to consider is the interest rate. Read on for a more detailed comparison.
A personal loan’s interest rate can be fixed or variable; either way, it will likely be lower than the rate you’d get with a credit card. But it will be higher than the rate you’d get with a home equity loan (particularly for unsecured personal loans).
In most cases, you may judge the interest rate on a personal loan by looking at the rate nationally. When it drops, that’s a positive development. Based on your credit score, the interest rate on a personal loan can be anywhere from 6% to 36%.
Since the home itself serves as collateral, home equity loans typically have lower interest than unsecured loans and credit cards. However, if you cannot repay the loan in full, the lender has the right to repossess and sell the property.
If the value of your property drops, you may find yourself “underwater”. This means that your mortgage is greater than the current market worth of your home.
Generally, home equity loans come with lower interest rates than personal loans, making them a more attractive loan option. Additionally, home equity loans often come with reduced or even zero closing costs. On the other hand, personal loans may have high closing costs due to their lack of collateral.
Potential Amounts and Repayment Terms
When considering a loan whether personal loan vs. home equity loan, take into account the amount you could borrow and the length of the repayment period. Home equity loans are typically larger in size than personal loans, making them ideal for large purchases.
The repayment period for a home equity loan typically lasts between 5 and 30 years. The repayment period for a home equity loan is also usually longer than a personal loan, meaning lower monthly payments.
On the other hand, personal loans have shorter repayment terms and are more suitable for smaller purchases and urgent expenses. The repayment period for a personal loan is two years, although the term duration might go up to five years. If you can afford payments over a shorter time frame, that’s the loan period you should go with.
Approval Processes and Credit Scores
The approval process for a personal loan vs home equity loan can differ significantly. Lenders evaluate personal loan applications based on a number of factors, including the borrower’s debt-to-income (DTI) ratio. They also check the interest rate that is legal in their state and the security offered in exchange for the loan. Most importantly they evaluate the borrower’s credit score and report.
Personal loans require a credit score of at least 660, while home equity loans only require a score of 620. As such, personal loans offer borrowers with less-than-perfect credit easier access to financing.
A low-interest rate reduces the overall cost of a loan. Thus, it makes sense for borrowers with good to excellent credit to qualify for one. Nonetheless, there are several loan companies that consider applicants with less-than-perfect credit.
Home equity loans, on the other hand, require an appraisal to determine the amount of equity in your home. They also require a credit check to assess your creditworthiness.
When deciding how much of your home’s value to lend you, a lender will look at your loan-to-value (LTV) ratio. Thus, telling you if selling your home will cover your current mortgage plus this new loan, and by how much.
Your specific monetary situation should direct your decision between a personal loan vs. home equity loan. When considering a loan, you should compare the features, fees, and interest rates of a personal loan vs. home equity loan.
Home equity loans are preferable for larger purchases and offer more favorable interest rates and repayment terms than personal loans. However, they are secured by your home, while personal loans are unsecured and require no collateral.
If you have poor credit, personal loans may also be more convenient as they have slightly more lenient approval processes. It is also important to conduct research, as lenders may have different eligibility criteria and fees for each loan type.
Each loan option has specific benefits and drawbacks to weigh before making an application, but both can be good choices if you’re in a financial bind. Before applying for a loan, it’s a good idea to weigh your options between a personal loan vs. home equity loan and make an informed decision based on the rates, fees, and terms offered by each lender.
Q: Is a home equity loan better than a personal loan?
A: When it comes to home equity vs. personal loans, it all depends on your individual needs. Home equity loans typically come with lower interest rates and longer repayment terms, while personal loans fund more quickly and don’t require collateral.
Q: What is a good credit score for a home equity loan?
A: Generally, lenders require a minimum credit score of 620 to qualify for a home equity loan. It’s important to note, however, that the minimum credit score can vary from lender to lender.
Q: What is the difference between a home equity loan and a line of credit?
A: A home equity loan is a one-time loan that is secured by the equity in your home while a home equity line of credit (HELOC) is a revolving loan that uses your home’s equity as collateral.