Personal loan vs. home equity loan: Which is right for me?

Photo of a mom holding her toddler in the newly renovated kitchen paid for with a home equity loan

July 25, 2024

4 min read

If you’d like to borrow money to cover a home renovation, consolidate debt, or meet other financial needs, personal loans and home equity loans are two good options. Either one can help you meet your goals, but the right financial product for you will depend on your situation. In this article, we’ll compare personal loans with home equity loans to help you choose.

Here’s what we’re going to cover:

What is a personal loan?
What is a home equity loan?
Personal loans vs. home equity loans
When to get a personal loan
When to get a home equity loan
Oportun: Affordable lending options designed with you in mind

Key takeaways

Both personal loans and home equity loans can be used for a wide variety of expenses.
Most personal loans do not require collateral. With a home equity loan, your house serves as the collateral. This means you could lose your home if you don’t pay back the loan on time.
A personal loan may be a better option if you’re consolidating debt or want to borrow a smaller amount of money. A home equity loan could be a good choice for a large project like home renovation.

What is a personal loan?

Personal loans are available through many banks, credit unions, and online lenders. You receive a lump sum of money and then pay it back, with interest and fees, over a fixed period of time. Personal loans can be used to cover a wide variety of expenses.

What is a home equity loan?

Home equity loans, sometimes called second mortgages, allow you to borrow against the value of your home. Like personal loans, they provide you with a lump sum of money that you pay back in regular installments. You may be able to borrow as much as 85 percent of your home’s equity.

What is home equity?
Equity is the difference between your home’s market value and the amount you still owe on your mortgage. You can think of equity as the portion of your home that you currently own.

Personal loans vs. home equity loans

Here’s a closer look at the differences between personal loans and home equity loans.

Repayment term

Personal loans usually come with repayment terms ranging from one to seven years. Terms for home equity loans can be as long as 30 years.

Loan amount

With a personal loan, you may be able to borrow from a few hundred dollars to several thousand dollars. With a home equity loan, you can often borrow up to 85 percent of your home’s value, minus what you owe on your mortgage.

Application process

Many lenders allow you to apply online for personal loans. The process is usually quick and easy. The application process for a home equity loan is more involved and may take up to two months.

Collateral

Most personal loans are unsecured, meaning you don’t have to provide collateral. With a home equity loan, your home is the collateral. This means you risk losing your home if you can’t pay back the loan.

What is collateral?
Collateral is something of value that you agree to give your lender if you fail to make your loan payments on time.

Fees

Personal loans typically charge origination fees and late fees. Home equity loans usually include origination fees, late fees, closing costs, and prepayment penalties.

When to get a personal loan

Here are some situations where a personal loan may be your best choice.

Your expenses are smaller

If you need to cover a car repair or another expense that will cost a few thousand dollars, a personal loan can be ideal.

You’re looking for quick funding

If you prefer to get money quickly, consider a personal loan. The application and approval processes are often fast and simple.

You don’t own a home or don’t want to risk losing your home

You don’t need to own a home to take out a personal loan. If you’re a homeowner but don’t want to risk losing your property, a personal loan may be a better option than a home equity loan.

When to get a home equity loan

Here are some situations where a home equity loan may be a better choice.

You want to borrow more money

If you’re looking to borrow a large sum of money and have built up a lot of equity in your home, you may want to consider a home equity loan.

You’re looking for a lower interest rate

Interest rates on home equity loans are generally much lower than those on personal loans. That’s because there is less risk to the lender when your home is used as security.

You’re funding a home improvement project

When you use a home equity loan to pay for home renovations, you may be able to deduct the interest you pay from your taxes. This can reduce your tax bill.

Oportun: Affordable lending options designed with you in mind

Now that you understand the basic differences between personal loans and home equity loans, you may want to explore Oportun’s affordable credit options. Visit our homepage to learn about: