Home Equity Loan vs. Personal Loan: What is Best for You?

If you’re a homeowner in need of a lump sum of cash — whether for home improvements, debt consolidation, education, or a major life event — you may be weighing the pros and cons of a home equity loan vs. a personal loan. While both provide access to the money you need, they differ vastly in terms of structure, borrowing power, and costs. The right loan depends on more than just your credit score or how much you need to borrow. It hinges on your goals, timeline, and how comfortable you are using your home as collateral. Knowing what to expect before you apply can bring peace of mind while helping you avoid surprises later on.

Key Takeaways

• Home equity loans are often best for homeowners with significant equity who need a larger sum of money for planned expenses like renovations or debt consolidation.
• Personal loans are typically better for smaller, short-term needs when you need fast cash or don’t want to use your home as collateral.
• The biggest difference between a home equity loan and a personal loan is the collateral component. Home equity loans are secured by your home. Personal loans are unsecured.
• Choosing the right loan depends on your financial goals, timeline, and the amount of cash you need.

At quick glance, the main difference between a home equity loan and a personal loan comes down to collateral — something of value the lender can claim if you don't pay back the loan.

Your home serves as collateral for a home equity loan, which typically means you can borrow more cash while paying a lower interest rate. By comparison, a personal loan is unsecured, meaning you don't have to put up anything as collateral. This also means that you'll likely pay higher rates for less money.

Here's how the loans compare:

Home equity loans pros and cons

A home equity loan lets you borrow a lump sum of cash using the equity you've built in your home. It's a type of second mortgage that typically comes with a fixed interest rate and predictable monthly payments, making it a stable option for long-term financial planning.

Homeowners often use home equity loans to finance large expenses such as home renovations, education costs, or consolidating higher-interest debt.

While a home equity loan can offer lower rates and higher borrowing limits, it also comes with risk — namely, your home is on the line if you fall behind on payments. That's why understanding the trade-offs in your home equity loan vs. personal loan decision is essential.

Pros:

• Lower interest rates than unsecured loans
• Potentially higher loan amounts
• Fixed payments and terms for easier budgeting
• Interest may be tax-deductible for home improvements in some cases

Cons:

• Requires sufficient home equity — the difference between the value of the home and what you owe on your mortgage
• Closing costs and appraisal fees may apply
• A longer approval process
• The risk of foreclosure if you can't repay

Personal loans pros and cons

A personal loan is a type of unsecured loan, which means you're not required to use your home or any other asset as collateral. These loans are based largely on your credit history, income, and debt-to-income (DTI) ratio, which measures your ability to take on more debt.

Because they're easier to qualify for and you typically get the cash more quickly, personal loans are often used for urgent expenses like medical bills, car repairs, or paying down credit card debt.

While a personal loan offers speed and simplicity, it often comes with higher interest rates and lower borrowing limits than a home equity loan. That's why it's best suited for smaller, short-term needs where you want to avoid tapping into your home's equity.

Pros:

• No collateral required
• Fast approval and funding
• Fit for almost any purpose
• Shorter loan terms can reduce long-term interest

Cons:

• Higher interest rates than secured loans
• Lower borrowing limits
• Rates and terms that may vary widely based on your credit score
• Potentially higher monthly payments due to shorter terms

When a home equity loan makes sense

A home equity loan can be a smart choice when you have equity built up in your home and you need cash for a large expense. Because the loan is secured, it typically offers lower interest rates and longer repayment terms than a personal loan. That makes it ideal for big-ticket expenses you plan to pay off over time.

Here are a few situations when a home equity loan may make more sense in your home equity vs. personal loan decision:

• Home renovations or repairs: This is especially ideal when the updates may increase your property's value.
• Debt consolidation: If you have high-interest credit card balances, a lower-rate home equity loan can reduce interest costs.
• Education expenses: This type of loan offers long-term financing for educational expenses with predictable monthly payments.
• Major purchases: These expenses may include medical bills or a wedding, when you prefer a fixed loan structure and can afford to use your home as collateral.

When a personal loan makes sense

A personal loan is often the better option when you need quick access to a lower amount of cash. Approval is usually faster, and the funds can be used for just about anything --- from emergencies to planned expenses.

Some common situations when a personal loan might be the right choice include:

• No home equity: You don't own a home or haven't built up enough equity to borrow against.
• Fast funding needed: Personal loans can sometimes be approved and funded within a day or two.
• Smaller expenses: You're covering smaller expenses like car repairs, moving costs, or medical bills.
• Simple process: You want a simple, no-collateral loan without home appraisal or closing costs.

How to choose between a home equity or personal loan

Deciding between a home equity loan and a personal loan depends on your financial goals, how much you need to borrow, how quickly you need the funds, and most importantly, whether you own a home.

A home equity loan may be better for larger, planned expenses where lower rates and longer terms are ideal. A personal loan might be ideal for smaller, urgent needs.

If you're leaning toward using your home equity, AmeriSave can help. Apply online in minutes and explore competitive rates and terms tailored to your needs.