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Personal Loans vs. Home Equity Loans: Which Is Better?

Edited by:
Kristin Marino verified

When you need money for a large purchase or a home improvement, a loan can help you get the money you need.

But should you use a personal loan or a home equity loan to get the cash you need? Let’s take a look at personal loans vs. home equity loans so you can figure out what’s likely to work best for you.

What Is a Personal Loan?

Personal loans are often unsecured loans, meaning that you don’t need collateral as security for them. While there are some secured personal loans that require you to offer your car, a valuable item, or some other form of security, many of the personal loans available to most borrowers are unsecured.

Getting a personal loan can be a little more difficult, though. Because there’s no collateral for the loan, some lenders have stricter credit and income requirements. You might need a higher credit score to qualify for the best interest rates. Additionally, you might have a slightly higher interest rate than you’d see with a home equity loan.

If you need money fast, though, a personal loan can be a good choice. Some lenders can get you money the day after you apply for funds.

Personal Loan Pros and Cons

What Is a Home Equity Loan?

When looking at personal loans vs home equity loans, it’s important to understand some key differences. Unlike most personal loans, home equity loans rely on what is probably your most valuable asset — your home.

With a home equity loan, you’re able to borrow based on how much value is in the home, relative to your current mortgage balance. In many cases, a home equity loan is issued in a lump sum. This is different from a home equity line of credit, which is also based on your home’s equity, but functions more like a credit card, where you draw the money as you need it.

Often, because the loan is backed by your home, it’s possible to get a lower interest rate. You might also be able to get a home equity loan even if you don’t have excellent credit. However, if you don’t have enough equity built up in your home, it might be difficult to get a home equity loan.

Home Equity Loan Pros and Cons

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

Both loans are legitimate ways to get the money you need for emergencies, home improvement projects, debt consolidation, and more. But there are some basic differences that can determine which loan is best for you and your financial situation.

Which Is Better: Personal Loan or Home Equity Loan?

When deciding between a personal loan vs. a home equity loan, it’s important to think about what is likely to work best for your situation. Both personal loans and home equity loans have their own advantages and drawbacks, so it’s important to review your own financial goals and needs to decide what’s best for your situation.

A personal loan might be better if:

If you don’t own your home, a personal loan is going to be a better fit, since you don’t have the equity. Additionally, if you haven’t built up much equity in your home, you might not be able to qualify for a home equity loan, so a personal loan could make sense.

For borrowers who need faster funding and a relatively small amount of money, a personal loan can be a better fit than a home equity loan. If you have good credit, you can usually get a good interest rate, making a personal loan a relatively easy option.

A home equity loan might be better if:

On the other hand, a home equity loan might make more sense than a personal loan if you’ve built up a significant amount of equity in your home. You can usually borrow more money with your home acting as collateral. On top of that, you might be able to get a lower interest rate with a home equity loan.

For borrowers who have more time to wait for funds, a home equity loan can be a good fit. If you have the time to wait for the funding and can go through the process of getting an appraisal, a home equity loan can be a good choice, since it often comes with a lower interest rate, even if you have less-than-perfect credit.

Frequently Asked Questions

Which is better, a personal loan or a home equity loan?

When looking at personal loans vs home equity loans, it’s important to consider your own financial needs, as well as your goals. Look at your own situation. In some cases, it can make sense to get a personal loan, especially if you need the money quickly and want flexible repayment terms. On the other hand, a home equity loan might work better if you need a large amount of money and you have enough equity to get the loan size you need.

Do personal loans and home equity loans hurt your credit score?

As with most loans, when you apply for a personal loan or a home equity loan, there will be a hard credit check. This can reduce your credit score by a few points, but it probably won’t have a big impact.
You’re more likely to have an issue if you miss payments on your loan. Missed and late payments can negatively impact your credit score, so if you get a loan, it’s important to have a plan for paying it off on time.

What are some alternatives to personal loans or home equity loans?

If you don’t want a personal loan or home equity loan, you can look to other choices. For example, you might be able to get a home equity line of credit instead or get a 0% APR credit card. Another option is to save up the money you need.

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