Home Equity Loan vs Personal Loan: Which Is Right for You?
The average personal debt in America is $38,000. With so many people in debt, consumers are getting better at educating themselves.
If you’re up against a home equity loan vs personal loan decision, you need to have all of the information before you decide. Understanding the loans and what they can mean to your life and your credit can mean the difference in thousands of dollars.
Continue reading this article to learn more about whether a home equity loan is good for you or if a personal loan is better.
The Down and Dirty About Home Equity Loan vs Personal Loan
As you’re looking at home loans and personal loans, you might be confused about which one is going to be the best for you. Neither loan is better than the other but you have to decide which one is good for your specific situation.
What Is a Personal Loan?
Personal loans are becoming more popular as people can’t afford day-to-day expenses. Whether it’s the car that broke down or a child that’s graduating, these expenses seem to creep up out of nowhere.
Many of these personal loans are unsecured. Unsecured means that there is no collateral. Most of these loans have fixed payments that are paid out over a certain amount of time.
Personal loans are almost always higher interest loans because there isn’t anything securing them which makes it riskier for the lender.
Personal loans can come as low as a couple of hundred dollars and even go up to $100,000.
According to Plenti, besides unexpected expenses, you’ll find many people using personal loans to update their home or to consolidate debt. Consolidating debt with a personal loan often makes sense when people have high-interest credit card debt. It isn’t uncommon for credit card companies to charge interest in the high 20%s.
If you want to get an unsecured personal loan, you’re going to have to have a good credit score. The better credit score that you have, the better interest rate you’ll likely qualify for.
What Is a Home Equity Loan?
A home equity loan is different than a personal loan. When you’re looking at equity in terms of a home loan, the equity you’re looking at is the difference between how much your home is worth and the current balance of your mortgage.
When you are approved for the loan, you’ll get the whole lump sum of the loan. You’ll pay it back over time and most of the time there is a fixed interest rate on the loan.
Many people refer to home equity loans as second mortgages since they are based on the value of your home and since they are secured by your home.
When you go for a home equity loan, you should know that you will go through a similar process as when you got the first mortgage. One of the things that will take place is the appraisal of your home.
Since home equity loans are secured loans, you’re likely to get a lower interest rate than if you are going for a personal loan. This is why many people opt to get a second mortgage on their home instead of paying for a high-interest loan.
If you’re going for a home equity loan, you should speak with more than one lender to see if you can get a better rate. Since you have the house to secure your loan, you may have multiple companies willing to lend you the money and competing over your business.
Home equity loans may have terms of three years or could even go up to thirty years depending on the terms you can negotiate.
Besides for looking at your income and your credit score, the lender will also look at what is known as the LTV or loan-to-value. This means they are going to see if the debt between your first and second mortgages could be paid off if you sold your house.
Which Loan Should You Pick?
Now that you understand more about personal loans and home equity loans, one of them is likely standing out to you as a better option. If you’re still not sure, here are a few other things to think about.
Benefits of Personal Loans
When you have a good credit score, you can get approved pretty quickly. You don’t have to wait for appraisals and approvals. You can get your loan and get on with your life quickly.
The obvious benefit of personal loans is that you don’t have to own a home to get the loan. According to the well-known Mogo Loans, even if you do own a home, if your home’s value is tanking right now, you don’t want to try to get a home equity loan on it so personal loans can save you from falling home prices.
Benefits of Home Equity Loans
If you own a home and have a lot of equity in it then it makes sense to use the home to get the money that you need. The interest rate is lower than a personal loan and you have a long time to pay off the loan.
Besides for lower interest rates, you may also be able to write the interest that you pay off on your taxes.
Learn More About Personal Finances
Now that you know more about a home equity loan vs personal loan, why not learn more about personal finances? Continue reading through our site and don’t forget to bookmark your favorite sections today.