- 22 Aug, 2023
Personal Loan Vs Home Equity Loan: Which is Best?
The importance of making the right financial
choice
If you are someone looking to cover any urgent or unexpected financial challenges, there will be two options that pop into your mind - one is a personal loan and the other one is a home equity loan.
Most borrowers today face a dilemma while choosing the right one and some end up choosing the wrong option due to various reasons such as the intensity of the loan amount required, the duration of claiming the amount to meet certain expenses, the rates of interest, and so on.
We want you to make the best choice according to your financial standing! Understanding the actual differences between these two types of loans helps you to make the right decision and become a smart borrower. In this blog, we'll explore the intricacies of personal loans and home equity loans, and find out whether a home equity loan requires an appraisal or not.
- Laura Ingalls Wilder
Personal loan Vs home equity loan - The Actual Difference
In the world of financing, personal loans & home equity loans are two different paths that lead to the same destination to meet your financial needs. Both help you meet your unexpected needs and fulfill your long-cherished dreams. Let’s guide you through two of these distinct routes, to secure your financial future.
Imagine you’re in need of immediate financial funds, be it for a medical emergency, consolidating debt, or pursuing your passion project. Personal loans help you meet these expenses. A personal loan is an unsecured loan, which means you don’t need to have collateral such as property or assets.
Instead, you need to show your credit worthiness & the ability to successfully repay the loan through monthly repayments. One of the main advantages of personal loans is that the borrowers get access to funds without having to relate to a specific purpose.
| Pros | Cons |
|---|---|
| Unsecured, doesn’t require a collateral | Higher interest rates due to its unsecured nature |
| Quick approval processes & more accessible funds | Limitations on the amount you can borrow |
| Can be used for various purposes [Medical bills, consolidating debt, planning a vacation & so on] | Taking more debt can impact credit scores in the long run. |
These types of loans revolve around the equity you’ve built in your home. You get to tap into the amazing value you have created in your home. Confused about what equity means? In simple terms, equity is the difference between your home’s market value and & the outstanding balance on your mortgage.
With the help of a home equity loan, you get to borrow against your home’s equity. These types of loans are a secured loan where your property serves as collateral. Homeowners who choose this type of loan mostly use the money for home improvements or educational expenses. What makes this an attractive option is its low-interest rates and higher borrowing limits.
| Pros | Cons |
|---|---|
| Secured & your property acts as a collateral | The application approval process can be lengthy and is time-consuming |
| They come with lower interest rates compared to personal loans | Assessing time to value your property takes most of the time. |
| Lower rates help lenders reduce their risk as they have a claim on your property if you default. | If you fail to make loan payments, the lender can legally claim your property as repayment. |
| Interest paid on home equity might be tax deductible, which is a financial advantage. | You have to meet additional expenses as part of closing costs [Application fees, appraisal fees, attorney fees, etc,.] |
Does a home equity loan require an appraisal?
Picture this feeling - You are looking for a home equity loan, researching & talking to representatives and friends to understand the process, but all of a sudden you get a burning question, is there an appraisal involved in the journey of securing a home equity loan? Just hold onto the curiosity as we are about to talk about this in the next section.
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The answer you’re looking for is a BIGGG YES! An appraisal is generally required when you’re planning to get a home equity loan. Your lenders prefer to make sure that they get the exact present value of your home/property.
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This appraisal process is done by a licensed professional who will put on the hats of detectives & examine factors such as your property’s condition, its location, and recent comparable sales in your neighborhood. This is essential to calculate the loan-to-value ratio which helps lenders understand the risk associated with the loan.
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Wondering about the outcome of this appraisal process? It directly influences the amount of loan you are eligible to receive. A perfect & accurate appraisal ensures that you’re borrowing an amount that aligns with your property’s value. This ensures that you and your lender get a fair assessment of the asset.
Borrowing a personal loan differs as per the age criteria of an individual, and we found some insights that could be of use to you.
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Baby boomers [born between 1946 - 1964] - Hold the highest average personal loan balance at $21,644
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GenX [born between 1965 - 1980] - Comes second with an average personal loan balance of $20,677
We know the battle of choosing a personal loan vs a home equity loan is a real challenge and requires the borrowers to do a careful analysis of their financial situation & actual requirements. While you get quick access to funds with a personal loan without the need to show collateral, home equity loans provide you with lower interest rates & larger borrowing capacities at the cost of using your home as collateral.
A home equity loan also helps you to stay responsible and capitalize on your home’s value and use it to consolidate debts or meet any uncertain financial expenses.
Educating yourself on these major differences between a personal loan vs a home equity loan helps you make a smart move & align with your long-term financial aspirations. Always remember that you need to have a personal financial expert who can guide you throughout the process of your loan processing journey.
