Home Equity Loan vs Personal Loan: Which is Right for You?

November 25, 2024

Home Equity Loan vs Personal Loan: A Comparison Guide

Deciding how to fund significant expenses—like home renovations, consolidating debt, or a large purchase—often comes down to choosing the right type of loan. Home equity loans and personal loans are two popular financing options, but their features and benefits vary depending on your needs and financial situation. By understanding the nuances of each, you can make a decision that aligns with your financial goals and long-term stability.

What Is a Home Equity Loan?

A home equity loan, often called a second mortgage, allows homeowners to borrow money by using the equity in their property as collateral. Equity is the difference between your home’s current market value and the amount you still owe on your mortgage. This type of loan typically offers fixed interest rates and predictable monthly payments, making it a dependable choice for borrowers seeking stability. Borrowers receive the entire loan amount upfront in a lump sum, which is particularly useful for large, one-time expenses.

What Is a Personal Loan?

A personal loan is an unsecured loan, which means no collateral is needed. Banks or other financial institutions approve these loans based on your creditworthiness, income, and financial history. Personal loans are versatile and can be used for a wide variety of purposes, such as covering medical expenses, consolidating debt, or even funding a vacation. Since they are unsecured, personal loans often come with higher interest rates than loans secured by collateral, but they are easier and faster to obtain.

First Hope Bank offers two types of personal loans to match your unique financial needs: Deposit Secured Loans and Life Happens Loan.

With a Deposited Secured Loan, First Hope Bank customers can build on their existing relationship with us by using their First Hope savings account or Certificate of Deposit as collateral to secure their personal loan. It allows you to continue to earn interest on money in your savings account while opening up more competitive interest rates and a faster application process.

Our Life Happens Loan is a unique loan option for those caught off-guard by large, unexpected expenses like a car repair, medical procedure, or wedding. There’s no need for collateral to qualify. You can borrow between $2,500 and $20,000 with terms between 24 and 84 months. With First Hope Bank, approval is fast. Also, borrowers with higher credit scores can access lower, competitive interest rates. 

Key Differences Between Personal Loans vs Home Equity Loans

Collateral Requirements

Home equity loans are secured by your home, meaning the property is used as collateral. This security lowers the risk for lenders and often results in lower interest rates. In contrast, personal loans are unsecured, meaning they do not require collateral. Approval for a personal loan is based on the borrower’s credit profile rather than any physical asset.

Interest Rates

Home equity loans generally offer lower interest rates because they are backed by collateral. Personal loans, being unsecured, tend to carry higher interest rates, particularly for borrowers with lower credit scores.

Loan Amount

Home equity loans usually allow larger borrowing limits since the loan amount is determined by the available equity in your home. Personal loans typically have lower caps, as the maximum amount depends on the borrower’s income and credit history.

Loan Disbursement

Both loan types provide the funds as a lump sum. However, home equity loans often have a lengthier approval process due to property appraisals and more extensive paperwork. Personal loans are quicker to process, making them better suited for urgent financial needs.

Repayment Terms

Home equity loans often have longer repayment periods, sometimes up to 30 years, which can make monthly payments more manageable. Personal loans, on the other hand, typically have shorter terms, ranging from two to seven years, which allows for quicker debt resolution.

Choosing Between a Home Equity Loan vs Personal Loan

Assess Your Financial Situation

The first step in deciding between these loans is evaluating your financial position. Look at your credit score, income, and whether you have substantial equity in your home. A home equity loan might be the better choice if you need a larger loan amount and can offer collateral.

Determine the Purpose of the Loan

Your intended use for the loan should guide your decision. Home equity loans are ideal for significant expenses like home improvements or consolidating high-interest debt. Personal loans, with their flexibility, are better suited for smaller, immediate expenses or when home equity isn’t available.

Weigh the Risks

Consider your comfort level with risk. A home equity loan puts your property on the line, so if you default, you could face foreclosure. Personal loans, while unsecured, carry higher interest rates but do not endanger your physical assets.

Compare Repayment Terms

Think about your ability to meet repayment schedules. Home equity loans typically offer longer repayment terms, leading to lower monthly payments. Personal loans, with shorter repayment periods, help you pay off the debt sooner but may have higher monthly payments.

Evaluate the Speed of Access

If you need funds quickly, a personal loan may be the better choice due to its faster approval process. Home equity loans can take longer because of the appraisal and underwriting requirements.

Finding Your Best Loan Options with First Hope Bank At First Hope Bank, our commitment to personalized financial solutions is rooted in over a century of service to our community. Our Home Equity Fixed Loan offers the stability of fixed, competitive interest rates and predictable monthly payments, making it an excellent choice for major expenses like home renovations or debt consolidation. For more flexible needs, a personal loan with First Hope Bank provides competitive rates and requires no collateral, making them ideal for smaller, time-sensitive financial goals. As your neighborhood bank, we offer local-decision making and personal service every step of the way. We’re here to help you navigate your borrowing options and choose the best loan for your unique situation. Schedule an appointment with one of our loan specialists today!