A personal loan can be availed for any financial requirement you may have. Borrowers with credible personal loan eligibility can avail of these loans to travel, study, for business, while buying or renovating a home, etc. Home equity loans are more specific in their usage. As it is a secured loan, it differs significantly from a personal loan.
What is a personal loan?
A personal loan, also referred to as a consumer loan, is a multipurpose loan serving the borrower’s needs from debt consolidation, medical expenses to large purchases. It is unsecured, i.e., it does not need any kind of security. You can avail of this loan based upon your income, credit score, profession, repayment capacity, and employment history. Personal loan interest rates can be quite wide, depending on the personal loan eligibility of the applicant.
What is a home equity loan?
A home equity loan, also called a second mortgage, empowers you to borrow money against the equity in your home. It is a secured loan where your home becomes the security for the disbursement of the loan by the lender. You are required to have home equity of at least 15% to 20%, which means you can borrow up to 85% of your home equity loan.
If you want to make the right choice between the two as per your needs and circumstances, let us take a closer look at both loans by knowing their pros and cons.
Pros of a personal loan:
- A personal loan gets approved in lesser time if compared to a home equity loan. It can even be pre-approved, which further shortens the processing time.
- In case of default in the repayment, there is no risk of any property being repossessed by the bank.
Cons of a personal loan:
- Being an unsecured loan, personal loan interest rates are generally higher as they represent a higher credit risk for the bank.
- Some lenders levy prepayment charges if you pay off your total loan before the stipulated tenure.
- As the repayment tenure is shorter than a home equity loan, the monthly payments can be higher. You will find that out by checking a personal loan EMI calculator.
Pros of home equity loan:
- The interest rate on home equity loans is lower than personal loan interest rates.
- The repayment tenure is longer than a personal loan. Therefore, the overall interest cost may be high, but the EMI burden will be lower.
- If you are using the fund for renovation or reconstruction of your home, you can get a tax deduction on the interest paid.
Cons of home equity loan:
- In case you become a defaulter during your loan repayment, there is a risk of your home being repossessed by the bank.
- Approval time of your home equity loan takes a longer time as compared to a personal loan.
- Foreclosure of the loan is generally expensive.
- The minimum loan amounts set by some lenders may be higher than your needs.
When to choose a personal loan
- If you have a small expense.
- If you don’t want to attach your property to the loan.
- If you do not have enough equity.
- If your credit score is brilliant.
When to choose a home equity loan
- If you have more than enough equity.
- If your credit score is not good.
- If you want a loan at low rates.
- If you want to refurbish your home.
Both types of loans have their merits and drawbacks. Factors like your financial requirement and credit standing can help you decide which loan to choose.