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Home Equity Loan Vs. Personal Loan: Which Is Better For You?

4-Minute Read


Homeowners with enough equity in their homes can apply for a home equity loan. Such loans are considered a low-cost way to finance a home improvement project or other major purchase.

But home equity loans aren't the only option if you want to borrow money to finance a kitchen remodel, pay off any high-interest rate credit cards or help cover any added family costs. Some alternatives, like personal loans, can step in and be just as affordable.

So, what’s the best choice? Here, we’ll show you the similarities between a home equity loan and a personal loan. We'll also cover what you should consider before applying for either one.

Personal Loan Or Home Equity Loan: What’s The Difference?

The main difference between a personal loan and a home equity loan is the type of collateral required and how you’ll get approved. Both types of loans allow you to use funds for almost any reason. But it's important to know difference.


Home Equity Loan

Personal Loan


You borrow against the equity in your home. If you have $70,000 of equity, for example, you might be able to qualify for a home equity loan of $60,000.

Your home equity is not involved. Lenders look at your credit score, income and debts to see if you qualify for a personal loan and how much they are willing to lend you.

Collateral Requirements

Your collateral is your home. If you stop making payments, your lender can take your home through the process of foreclosure.

Most personal loans require no collateral. If you stop making payments, lenders can’t take your car, home or any other asset. This is typically why personal loan APR / interest rates are higher than other types of loans.


Lenders will check your credit score, income and debts to determine if you qualify and at what interest rates.

Lenders will also look at your credit score, income and debts when setting your interest rate and determining if you qualify for a personal loan.

Repayment Process

You pay back a home equity loan in monthly installments, with interest.

The same holds true for personal loans: You pay back your loan in regular monthly payments that include interest.

How Do Personal Loans Work? 

As listed in the above chart, personal loans are typically unsecured loans, meaning that you don’t need to back up your loan with collateral like your car or your home.

Once your application is approved, you’ll receive a lump sum payment that you pay back over time, usually in fixed monthly payments. APR or interest rates tend to start higher than what you would pay for a home loan, but they can be lower than other rates, such as credit cards.

Your credit history and ability to pay back your loan (determined by factors such as income and existing debts) get taken into consideration when you apply for a personal loan, so the higher your score, the better rates and terms you’re likely to receive.

Don’t know what your score is? Use our sister company, Rocket Homes®, to check your credit for free and even learn ways to potentially raise your score.

How Does A Home Equity Loan Work?

Home equity loans are a type of secured loan where your home acts as collateral. If you can’t pay back your loan, the lender has the right to seize your home through the foreclosure process. Then the amount you qualify for is determined by factors including the amount of equity you have in your home, the value of the house, your credit history and ability to pay back the loan.

Since home equity loans are secured, borrowers tend to get a lower interest rate than one they’d get when taking out personal loans. That’s because the risk to lenders is lower. If you stop making payments, they can take possession of your home, giving them a financial safety net.

Terms can also be much longer with a home equity loan. Just like with personal loans, you’ll receive your loan amount in a lump sum and pay it back over a set term, usually with a fixed rate.

Both personal loans and home equity loans can come with origination fees, which is what you’ll pay to process the loan. Personal loans normally process faster than home equity loans since the latter typically requires a more extensive application process.


Is It Better To Get A Home Equity Loan Or Personal Loan?

Well, it depends. Both loans offer advantages and large amounts of cash, depending on your requirements and financial situation. Of course, there are risks with either choice, and they differ in terms of how to qualify. Let’s take a look at the strengths of each option.

When To Choose A Personal Loan:

Here are some common reasons you might want to consider applying for a personal loan:

You Want Money Quickly 

Getting approved for a personal loan is usually faster than the approval process for a home equity loan. You can get cash in your account in as little as a business day, depending on the loan amount and the lender. Borrowers don’t have to go through demanding processes like an appraisal and other reviews as they would for a home equity loan.

You Don’t Want To Borrow A Lot Of Money

Generally, a personal loan is best if you want to borrow money in smaller amounts. In fact, a personal loan is often your only option if you’re looking to borrow a smaller sum (think under $50,000). However, if you want a higher loan amount with a faster approval process, consider a cash-out refinance. It’s a good way to get a quick loan if you’re a homeowner with some accrued equity.

You Want An Unsecured Loan

Unlike a lot of other loan types, a personal loan is unsecured – meaning you won’t need to front any collateral. Instead, your loan approval will be contingent upon your credit score, income and other financial circumstances. If worse comes to worst, defaulting on your payments will negatively affect your credit score, but it won’t cause you to potentially lose your home.

When To Choose A Home Equity Loan

Here are some common reasons you might want to consider a home equity loan:

You’re Interested In A Lower Interest Rate

Home equity loans tend to have better interest rates than personal loans. If you believe you can make on-time payments and are comfortable with the risk of losing your home if you don’t, then consider this option.

You Want Long-Term Flexibility

Personal loans offer some decent payment terms and fixed terms, but they may not be as long as the ones for home equity loans – some can last as long as 30 years. Generally, that means your monthly payments will be lower, and you’ll have more options for your repayment.

You Need To Borrow More Money

If you want to borrow a large sum of money (more than the typical personal loan lending limit of $50,000), it could be a better idea to go the home equity loan route, especially if you have significant home equity. Plus, lower interest rates can save you thousands over the loan’s lifetime. Of course, always remember that what you borrow will need to be repaid – with interest.

How To Get A Personal Or Home Equity Loan

There are some important differences in the process of applying for a home equity loan and a personal loan, respectively. Here’s what you can expect:

Applying For A Home Equity Loan

When you apply for a home equity loan, be prepared to show plenty of paperwork. Lenders need proof that your income is high enough and your debt is low enough that you can afford your monthly payment.

Your lender might ask for copies of your most recent bank account statements, paycheck stubs, tax returns and W-2 forms. They might also ask for your most recent credit card statements.

Lenders will also review your three credit reports, each maintained by the national credit bureaus of Experian®, Equifax™ and TransUnion®, and pull your three-digit FICO® credit score.

The higher your score, the more likely you are to get approved and the lower your interest rate will be. Most lenders consider a FICO® Score of 740 or higher to be particularly strong.

Applying For A Personal Loan

Applying for a personal loan is usually an easier, and faster, process. Typically, you’ll log onto the website of a personal lender. After reviewing its terms, you’ll fill out the lender’s online loan application.

This usually requires that you provide such basic information as your name, current address and employment information. Lenders might also require that you provide copies of your recent bank account statements and paycheck stubs so that they can verify your income.

You might also need to provide proof of your address. This can include a copy of your driver’s license or a copy of recent utility bills.

Lenders, as they do with home equity loans, will also check your credit score and credit reports.

The big difference? Lenders will usually be able to tell you in just a few hours if you are approved for a loan. And you’ll often receive your money in as little as 1 or 2 days.

Final Thoughts

There are no hard and fast rules when deciding between a personal loan versus a home equity loan; the best choice depends on you and your unique financial situation. Before proceeding, think carefully about whether you’re willing to put up your home as collateral for a lower rate, or want to receive money faster but at a potentially higher rate. Also consider how much you need to borrow and whether you can afford the payments.

Then, make sure you shop around for the best rates. Ask lenders as many questions as you want to make sure you’re clear on terms and rates so you can get the best deal possible. At Rocket Loans®, we let you look at your personal loan options without affecting your credit score.

Whichever option you decide is the best fit, assess your credit situation so you can understand exactly what you qualify for. 

Interested in applying for a personal loan? Get started today.

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