Money tips for everyday life
Personal Loan vs. Home Equity Loan: Which is Better for Homeowners?
When you own a home, you have access to a unique financial tool: your home equity. But just because you can tap into your home's value doesn't always mean it's the right choice for your current needs. A personal loan can offer a faster, lower-risk alternative that can be just as effective.
Understanding the core differences between a personal loan vs. home equity loan can save you thousands in interest and protect your most valuable asset.
What is a Home Equity Loan?
A home equity loan is often referred to as a "second mortgage." It allows you to borrow a lump sum of money using your home as collateral. Because the loan is secured by your property, it typically offers lower interest rates than unsecured loans.
- Borrowing Power: Most lenders prefer that you only borrow up to 80% of your home's equity, but it varies by lender.
- Terms: You typically repay the loan with equal monthly payments over a fixed term.
- Risk: If you are unable to make payments, the lender has the legal right to foreclose on your home.
How Personal Loans Differ
A personal loan is typically an unsecured installment loan. Unlike a home equity loan, it does not require you to use your home (or any other asset) as collateral.
- Speed: While a home equity loan can take up to a few weeks to fund due to appraisals and paperwork, personal loans through Upgrade can often be funded within one business day of verification.*
- Risk Profile: Because the loan is unsecured, your home is not at risk of foreclosure if you default.
- Predictability: Like home equity loans, personal loans offer fixed rates and fixed monthly payments, making them easy to fit into a monthly budget.
Side-by-Side Comparison
Feature | Personal Loan | Home Equity Loan |
Collateral | None (Unsecured) | Your home (Secured) |
Interest Rates | Generally higher compared to home equity loans | Generally lower compared to personal loans |
Funding Time | Fast (days) | Slow (weeks) |
Closing Costs | Low to none (but typically an origination fee) | High (a percentage of the loan amount) |
Tax Benefits | None | Potential deductions if used for home improvement |
When to Choose a Personal Loan
Even if you have plenty of equity, a personal loan might be the smarter choice if:
- You need money quickly: For urgent repairs like a leaking roof or emergency medical bills, the weeks-long wait for a home equity loan may be too long.
- You have a smaller project: Many home equity loans have minimums starting at $10,000. If you only need $5,000 for a minor upgrade, a personal loan may be a better fit.
- You don't want a second lien: If you are planning to sell your home soon, having a second mortgage can complicate the closing process.
- You want to avoid closing costs: Home equity loans can often come with appraisal fees, title searches, and notary fees that can add up to thousands of dollars.
When a Home Equity Loan Makes Sense
A home equity loan is typically reserved for major, long-term investments where the interest savings outweigh the high closing costs and risk. This includes:
- Major Renovations: Extensive kitchen remodels or room additions that significantly increase home value.
- Very Large Expenses: Borrowing needs that exceed $50,000.
- Consolidating Massive Debt: If you are consolidating a very large amount of debt and need a longer repayment term to make the payments affordable.
Borrowing with Confidence at Upgrade
Upgrade’s lending partners offer personal loans that provide the speed and flexibility homeowners need without the complex paperwork of a second mortgage. With no prepayment penalties, you can pay off your loan as fast as you'd like, giving you full control over your home's equity.
Curious to see what a personal loan would look like for your next project? You can check your rate with Upgrade in minutes with no impact on your credit score.
Personal loans made through Upgrade feature Annual Percentage Rates (APRs) of 7.74%-35.99% and a 1.85%-9.99% origination fee, which is deducted from the loan proceeds. Lowest rates require Autopay and paying off a portion of existing debt directly. For certain discounts, collateral may be required. Repayment terms from 24 to 84 months. For example, if you receive a $10,000 unsecured loan with a 36-month term and a 17.59% APR (which includes a 13.94% yearly interest rate and a 5% one-time origination fee), you would receive $9,500 and would have a required monthly payment of $341.48. Over the life of the loan, your payments would total $12,293.46. The APR and other terms of your loan may vary and you may not be presented with multiple offers. If offered, your loan terms, including your rate, will depend on credit score, credit usage history, loan amount, and other factors. Late payments or other fees, as noted in your Borrower Agreement, may increase the cost of your fixed rate loan. Certain loan offers may not be available in all states.
*After acceptance, your funds will be sent within one (1) business day of clearing necessary verifications. Funds availability is dependent upon your bank’s transaction processing time and may take up to 2 weeks if sent directly to third party creditors.
