Personal loan

Own a house? Here’s why you might still want a personal loan over a home equity loan

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It’s not always profitable to leverage the equity in your home.


Key points

  • Homeowners can often borrow against their properties through a home equity loan.
  • It means taking the risk of losing your home if you can’t repay the loan.
  • You can avoid this risk by getting a personal loan instead.

There may come a time when you need to borrow money, whether it’s to pay expensive medical bills, renovate your home, or start a business. If you own a home, you may have the option of borrowing against the equity you own.

Equity refers to the part of your home that you fully own. If you have a property with a market value of $500,000 but owe $350,000 on your mortgage, that leaves you with $150,000 in equity.

You can explore several options for borrowing against your home equity, and one of the most common is a home equity loan. The advantage of going this route is to lock in a fixed interest rate on the amount you borrow. (HELOCs, another popular borrowing option for homeowners, come with variable interest rates, making them harder to repay.)

Additionally, home equity loans tend to charge competitive interest rates. And qualifying for one can be quite easy if the equity in your home is there.

But while you may qualify for a home equity loan, you may want to take out a personal loan instead. Here’s why.

Are you comfortable putting your house on the line?

Home equity loans are a type of secured debt. This means they are tied to a specific asset – your home.

In some ways, that’s a good thing. Since your home is used as collateral for a home equity loan, you may find it easy to get one, even if your credit score isn’t great.

But there is a danger in borrowing against your home. If you fall behind on your home loan payments to an extreme degree, you could end up losing your home. That’s because your lender might force the sale of your home in order to get paid off, much the same way a mortgage lender might go down the same route if necessary.

With a personal loan, this will not happen. Personal loans are unsecured, so they are not tied to any specific asset. Qualifying for a personal loan usually depends on good credit, because your lender can’t fall back on an asset they can sell or repossess to repair. But if you have strong credit, you may find that a personal loan allows you to borrow money affordably without having to put what might be your most important asset on the line.

What is the best choice for you?

Let’s be clear on one thing. Falling behind on a personal loan could have serious consequences, including severe damage to your credit score. But with a home equity loan, you risk losing the roof over your head if things go wrong. And that’s something you might not feel comfortable with.

You could end up with a more competitive interest rate on a home equity loan than on a personal loan. But if it helps you sleep better at night, it might be worth seeing how personal loans work and if one is right for you, even if the option of tapping into your home equity exists.

The Ascent’s Best Personal Loans for 2022

Our team of independent experts have pored over the fine print to find the select personal loans that offer competitive rates and low fees. Start by reviewing The Ascent’s best personal loans for 2022.