If you’re seeking the best way to consolidate debt, you’re not alone. It can be hard to keep up with multiple high-interest credit cards alongside car loans, student loans, or other debts.
Debt consolidation offers a way to simplify your finances. Before you apply, we’ll help you decide which loan type is better: a home equity loan vs. personal loan!
What Is a Personal Loan?
A personal loan is a type of installment loan. With installment loans, you’re approved for a set amount and then pay the loan back at regular intervals or installments. The loan is disbursed to you in one lump sum payment with your payment typically due on the same day of each month.
Personal loan rates are generally fixed so your monthly payment will stay the same over the life of your loan. You can use the funds for just about anything, including debt consolidation.
How Personal Loans Work
Once you’ve applied for a personal loan and are approved, your funds are disbursed into your account or by check. You’ll begin the repayment process right away. Making on-time payments can help you build a positive credit history as your repayment history will be reported to the credit bureaus.
Repayment timelines vary for personal loans, but you’ll generally see terms of one to four years. Shorter terms typically get lower rates but your monthly payment will be higher. Longer terms offer more affordable monthly payments but you'll pay more total interest.
What Is a Home Equity Loan?
If you’re a homeowner, you may be eligible to apply for a home equity loan. Equity is the difference between the amount your property is worth and your current mortgage balance. If you apply for a home equity loan, you're offering that equity as collateral for the loan.
The maximum amount you can borrow is based on how much home equity you have as well as other factors like your income and credit history. You may be able to borrow up to about 80% of your equity.
How Home Equity Loans Work
You’ll receive your home equity loan amount in a lump sum and pay it back over time, with a fixed interest rate and regular monthly payments. Since home equity loans are secured by the value of your home, they're often called second mortgages. In general, rates for secured loans are lower than for unsecured personal loans.
Before approval, lenders will need to follow some of the same processes they would for your first mortgage loan, including ordering an appraisal to accurately determine how much equity you have.
Pros: Home Equity Loan vs. Personal Loan
You can save money and reduce stress by consolidating high-interest debts into a single loan with a better rate. Let's look at the advantages of using each loan type to do the job.
Home Equity Loan
By leveraging your home’s equity, you can consolidate multiple debts into one easy and affordable monthly payment. Your home acts as the secured collateral to these loans, so you’ll have access to significantly lower interest rates than with other forms of debt like a personal loan or credit card.
Home equity loans offer a lot more flexibility in term length and loan amount. You may borrow more and pay it back over a longer time.
Bonus tip: The interest on your loan could be tax deductible if you use your home equity loan funds to make substantial improvements to your home. This is a major advantage when comparing the two loan options.
A personal loan is likely to be your most accessible and fastest option for consolidating debt. It may also bring peace of mind, knowing your home is not at stake! The application process is faster and available to you whether you’re a homeowner or not.
With a strong credit history, you can expect to quickly get the money you need to begin paying down your debt immediately. Personal loans offer a simple solution for smaller amounts. You can access funds more easily with much less paperwork and closing requirements.
Cons: Home Equity Loan vs. Personal Loan
Now let's turn to the disadvantages that each of these loan types may bring when you use them to consolidate your debt.
Home Equity Loan
The most important downside to a home equity loan is that you're putting your home at stake. If you aren't able to make payments, you run the risk of losing your home. You should always consider any financial hardship you could be in before using your home as collateral for a loan.
You need strong credit and financial history to get the most competitive rate and terms for a home equity loan. If you’ve struggled to make payments on time or missed any payments, it could be hard to qualify – even with using your home as collateral.
You may need to pay a loan origination fee, an appraisal fee, and closing costs
The downside of personal loans is that they’re unsecured so interest rates will likely be higher. In addition, if you have significant amounts of debt, it can be more difficult to qualify for a personal loan that is large enough to pay it all off. You may simply add another debt to your list.
Keep in mind most lenders have a maximum they're willing to loan for personal use. At Best Reward, our maximum is $15,000 up to a four-year term.
Get Ready to Consolidate Your Debt
When comparing a home equity loan vs. personal loan, you can decide which option is best for you based on your current and long-term financial history. Best Reward is here to help you feel confident about your choice!
If your debt is less than or equal to $15,000, a personal loan is likely a better option for you. If your debt is more than $15,000, a home equity loan could be better provided you qualify and meet the requirements. Click below for more details about these popular financing tools.
Home Equity Loan Personal Loan