There may come a time when you need to borrow money, whether it’s to fix your car, pay a big medical bill, or cover some other unforeseen expense. The good news is that there are a number of loan products that allow you to borrow money for any reason. These include personal loans and home equity loans.
Often times, you will get a lower interest rate on the amount you borrow when you take out a home equity loan compared to a personal loan. If you own a property with enough equity, a home equity loan can also be easier to obtain.
Despite this, you may still feel more comfortable taking out a personal loan. Here’s why.
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When you don’t want to endanger your home
Personal loans are unsecured loans. This means that they are not backed by a specific type of guarantee.
Mortgages, for example, are secured loans, backed by the houses they finance. If you don’t make your mortgage payments, you could risk losing your home. But if you fall behind on your personal loan repayments, you don’t risk losing a specific asset.
Home equity loans work just like mortgages in this regard. When you take out a home equity loan, it is secured by your home itself. If you fall behind on your loan payments, you could risk losing your home.
It is for this reason that you may want to consider borrowing through a personal loan the next time you need money. This way you don’t put yourself in a situation where you could risk losing your home.
Be careful when borrowing with a personal loan
While personal loans are unsecured and you may think that the damage will be less severe if you fall behind, you should be aware that defaulting on a personal loan could cause significant damage to your credit score. Once this happens, it can become quite difficult to borrow money if you need it.
Also, with a personal loan, the higher your credit score at the time of your application, the lower the interest rate you are likely to get on your loan. If your credit score is not at its best, you could end up with a higher interest rate which will make it harder to manage your loan payments.
Home equity lenders also review the credit scores of applicants. But because home equity loans are secured, you may find it easier to qualify for a loan with less than the best credit rating. This means that you might be able to get a better interest rate with a home equity loan.
If you fall behind on a home equity loan, your lender could eventually force the sale of your home to be paid off. These lenders are generally more concerned with the amount of your equity and less with the appearance of your credit score.
Should you choose a personal loan or a mortgage?
Whatever loan product you use to borrow money, it’s important to keep track of your payments. If you are not sure if you can do this, you might be better off delaying your loan application or finding another way to meet your need for cash.
That said, the idea of a personal loan may be more suitable for you than the idea of a home equity loan. If so, do some research on the rates before signing a loan so that your payments are as manageable as possible.