Personal loans and home equity loans are two ways to get money when you need it. If you need money to buy something big, pay for education expenses, or repair your home, these two options will be much better for you. A personal loan is a loan that can be taken without any guarantee.
In this, you do not need to guarantee anything, while in a home equity loan, you take a loan against your home. Both have their own benefits and conditions, but it is important to see which one is best for you.
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Features Of Home Equity Loans
A home equity loan is very different from a personal loan. You use the equity in your home as collateral, i.e., the portion of your home loan that you have paid off.
Secured with equity
When you make payments on your home loan, equity builds up in your home. This means that the portion of the home that you have paid for is yours. Homeowners can take out further loans by putting up this equity as collateral.
Such loans are also commonly called second mortgages because they work almost like a regular home loan.
Loan amounts & terms
You can borrow as much money in a home equity loan as your home is worth. This means that if you have paid off $ one lakh of your home loan, you will be able to borrow up to $ one lakh. The more you have paid off your home loan, the more you will be able to borrow.
Keep some other things in mind when taking a loan, such as if the value of the house decreases, the bank will not give you as much money as you would like. If your old loan and new loan together exceed the value of the house, the bank will not give you a loan. But if your loan is less than the value of the house, the bank may give you a loan at a better interest rate. The repayment period for a home equity loan is very long, most of them are 30 years, which makes it easier, but you have to pay the loan for a longer period.
Extensive approval process
There is also a disadvantage to taking out a home equity loan because this loan is also called a second mortgage. The bank takes complete information about the home, looks at its value, and it can take about a month to process.
Most common uses
Home equity loans are usually taken out to cover major expenses such as education, medical expenses, or similar expenses. The interest rates on these loans are usually much lower than personal loans, so they can also be a good way to eliminate high-interest loans.
Features Of Personal Loans
Getting a personal loan from either of these has become very easy. You just apply for the loan. The bank or lender looks at your credit history and borrowing record, after which they decide how much loan to give you.
Typically unsecured
Personal loans are usually given without any collateral, which means you don’t have to pledge anything, but often, when you borrow a large amount of money, the bank or lender may ask you for something as collateral.
Loan amounts & terms
Personal loans are mostly taken to meet urgent needs. Most people borrow up to $15,000. Lending institutions also have a certain limit. For example, a company gives a personal loan of up to $25,000.
If you borrow more than that, they will ask you for more details. Such loans usually have a fixed interest rate of 12 to 60 months. If you extend the loan period, the interest rate also increases.
Quick approval
The process of getting a personal loan is usually very easy and straightforward. You just have to fill out the necessary forms and provide information, and submit them to the bank. The bank or lender checks your information, and many times your loan is approved on the same day. Therefore, a personal loan is an excellent and good option to meet emergency expenses.
Most common uses
Personal loans are usually taken out to pay for expensive purchases or home repairs. Many people also use these loans to consolidate high-interest credit card debt into one place. Doing so lowers the interest rate and gives them the benefit of a longer repayment period.
Personal Loans vs. Home Equity Loans – Which Should You Choose?
Which loan you need depends on what you need the money for. Not every person’s needs are the same, so not every loan is right for everyone. You have to take the loan that suits your needs and circumstances.
Advantages of Personal Loans and Home Equity Loans
| Advantages of Personal Loans | Advantages of Home Equity Loans |
| No need for a house or property | Longer repayment terms |
| Quick approval process | Ability to borrow larger amounts |
| Easier to get smaller loan amounts | Lower interest rates |
| No risk to personal assets | Possible tax benefits |
FAQs
How do people use personal loans?
People take personal loans to pay other debts, repair or improve their homes, or cover big expenses. Many people use them to combine several debts into one, which makes payments easier.
What is the difference between a personal loan and a home equity loan?
A personal loan doesn’t need any house or property as security. A home equity loan uses your house as security. Personal loans are quicker to get, while home equity loans usually have lower interest rates and let you borrow more money.
What is the downside of a home equity loan?
The main problem is that your home is used as security. If you can’t pay back the loan, the bank could take your house. It can also take more time to get approved because your home has to be checked first.
Bottom Lines
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If you have your own house and you need a lot of money, then an equity loan would be better for you, but if you only need a small amount of money, you will get money quickly from personal loans. Similarly, if you do not have a house or you have not accumulated much equity yet, then only a personal loan would be better for you.
