Personal Loans vs. Home Equity Loans

Anita required funds for a significant expense. When exploring her options, she came across a personal loan and a home equity loan. With a home equity loan, she had to put her property as collateral. But she could get a good interest rate and a large loan amount. With a personal loan, she didn't need collateral. 

Now, she is confused, which one should she choose? So, she compared the two.

Let's compare personal and equity loans, along with tips on choosing the right option.

What is a Home Equity Loan?

An equity home loan is a secured loan. You put a percentage of your home equity as collateral. Equity is the difference between the current marketable value and the mortgage amount you still owe.

Benefits of a Home Equity Loan

• The equity secures the loan. You get favourable loan terms, such as lower interest and a higher amount
• You can get a longer repayment schedule. This reduces the monthly repayment burden

Cons of a Home Equity Loan

• If you are unable to make payments, the lender may foreclose on your home
• If the market drops, and the home loses value, you may owe more than the value of the house. This makes it difficult to sell the house

What is a Personal Loan?

A personal loan is a type of unsecured credit. You don't need to put up anything as collateral. However, approval depends on your credit score, income level, and ability to repay the loan.

Benefits of a Personal Loan

• There are no usage restrictions on a personal loan, so you can use it to upskill, for home renovation, for higher education, for emergencies funds, or for other purposes. According to a report, 47.8% of loans are used for lifestyle-oriented needs, 20.38% for medical emergencies, 13.16% for family-related expenses, 6.31% for education, and 12.35% for household-related expenses.
• The approval and disbursement process is quick, so when you need funds urgently, a personal loan ensures quick support.
• The loan is unsecured, so you will not risk losing your assets if you fall behind in the payment schedule.

Cons of a Personal Loan

• The interest rates for a personal loan are higher, as these are unsecured.
• To get favourable loan terms, you need a high credit score. You might get higher interest rates and a lower loan amount.

Also read: What Will Happen If A Personal Loan EMI Bounces?

Key Differences Between a Home Equity Loan and a Personal Loan

Equity home loan and personal loan differ on the basis of security and loan terms. Here are the differences between a home equity loan and a personal loan:

When to Choose a Personal Loan and Home Equity Loan

The choice between a home equity loan and a personal loan depends on requirements, risk tolerance, and other factors. Here's when to choose a personal loan and a home equity loan:

A Personal Loan is The Right Choice When:

• You don't need a large amount of funds. A personal loan is ideal for moderate expenses, such as travel, a wedding, or buying electronics
• You need funds quickly and do not want to put your property as collateral
• If you have not built enough equity in your home, or it is jointly owned and cannot be used as collateral
• You have a good credit score, so you can get lower interest rates and a higher amount

A Home Equity Loan is The Right Choice When:

• If you have paid most of the home mortgage or the value of your home has significantly increased, you can get a large amount
• When you have time for the long approval process, and the financial obligation is not immediate
• You do not have a good credit score, but you can put up home equity as security

Manage Fund Requirements With Hero FinCorp

Before making a choice, consider your fund needs and financial profile. The choice between a home equity loan and a personal loan depends on your requirements and preferences.

And when you decide to go with a personal loan, head on to the instant personal loan app by Hero FinCorp. With a paperless process and quick approval, you get funds quickly and manage your fund requirements smoothly.

Frequently Asked Questions

What happens if I default on a home equity loan?

If you default on a home equity loan, the lender may foreclose on your home.

How quickly can I get funds from a personal loan?

The approval and disbursement of funds depend on the lender, but you can get the funds as quickly as the same day.

Are there tax benefits on home equity loan interest?

As per Section 24(b) of the Income Tax Act, you get a deduction on housing loans for constructing, purchasing, or repairing a residential property. If you use LAP funds for business or income-producing purposes, Section 37(1), the interest may be considered a business expense. If using LAP for personal purposes, you don't get a deduction.

Which loan has lower interest rates?

Home equity loans have lower interest rates.

Can I get a personal loan with bad credit instead of a home equity loan?

Yes, you can get a personal loan with bad credit, but the interest rates may be higher and the borrowing limit may be.

Disclaimer: The information provided in this blog post is intended for informational purposes only. The content is based on research and opinions available at the time of writing. While we strive to ensure accuracy, we do not claim to be exhaustive or definitive. Readers are advised to independently verify any details mentioned here, such as specifications, features, and availability, before making any decisions. Hero FinCorp does not take responsibility for any discrepancies, inaccuracies, or changes that may occur after the publication of this blog. The choice to rely on the information presented herein is at the reader's discretion, and we recommend consulting official sources and experts for the most up-to-date and accurate information about the featured products.