Home Equity Loan vs. Personal Loan – How to Choose

Published on September 30th, 2020

If you find yourself in need of some extra cash for financing an education or making home improvements, either a home equity loan or a personal loan can offer some much-needed financial flexibility. Each loan type comes with certain pros and cons, so it’s important to understand the differences and weigh your options prior to borrowing.

Both loans allow you to access additional cash when you need it, and the result of a successful application provides funds as a lump-sum payment. Both types of loans have fixed rates, which means you’ll know how much you have to pay each month over the life of your loan. However, the application process, as well as the finer details, differ considerably.

Home Equity Loans

These popular loans are based on the amount of equity (the difference between what you owe and your home’s value) you have in your home. For example, if your home is worth $300,000, and you still owe $150,000 on your mortgage, and you have no other loans secured using the property, the equity in your home is $150,000.

You should be aware that the maximum amount lenders will allow you to borrow is usually 85-90% of your equity. This means with that $200,000 in equity, most lenders will allow you to borrow $170,000 – $180,000, with many lenders offering 80% or less. Another important thing to consider is that with this type of loan, you are using your home as collateral. In the event you are unable to make your payments, you might lose your house. Additionally, if your home drops in value, it could put you underwater, meaning you owe lenders more than the house is worth.

One significant benefit of a home equity loan is that you will likely get a lower interest rate (because you are putting your home up as collateral), but you may incur loan closing costs which can eat into your cash proceeds.

Personal Loans

Personal loans are often referred to as unsecured loans or signature loans, because in these types of transactions, your signature is your bond. Personal loans can be used for anything you want. Common uses include medical expenses, debt consolidation, and home improvements. These types of loans are widely available, however, it is vital that you do your research, as some of the personal loans you’ll find are nothing more than glorified payday loans (with exorbitant interest rates).

If you are considering a personal loan, and want the best rates, it’s important to work with a trusted lender. Interest rates vary from state to state and from lender to lender, so it’s imperative to take the time to read the fine print, as they say. Because unsecured loans don’t require collateral, the interest rates run higher, as they are riskier for lenders than secured loans (those with collateral).

Personal loans are based solely on the information your lender has about you. If you have a very low credit score and a lot of debt, you may not be able to get a personal loan or you may be offered the loan, but at a higher interest rate than someone who has better credit.

When You’re Looking for a Home Equity Loan or Personal Loan in Schiller Park

There are risks and benefits to both home equity loans and personal loans. For anyone who has accrued a lot of equity in their home, if they know they will be able to make the payments, this type of loan offers the lowest interest rates and longer terms. Nevertheless, if it makes you nervous to put your home up as collateral, and if you don’t need to access as much cash, a personal loan might be a better choice.

If you are looking into obtaining either a home equity loan or a personal loan near Schiller Park, reach out to our team at Leyden Credit Union for more information and ask how we can help.

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