Personal Loan vs. Home Equity Loan: What’s the Difference?
Written by
Daria Uhlig
Edited by
Melanie Grafil
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A personal loan is different because it doesn’t require collateral, and most personal loans offer faster approval and funding compared to home equity loans.
A home equity loan lets you borrow a lump sum against the equity in your home.
Keep reading to find out how to decide which is right for you.
Key Differences Between Personal Loans and Home Equity Loans
| Feature | Personal Loan | Home Equity Loan |
|---|---|---|
| Funds received | Lump sum | Lump sum |
| Interest type | Usually fixed | Usually fixed |
| Collateral required? | No | Â Yes |
| Best for | Emergency expenses you can’t pay out of pocket | Large one-time expenses |
| Credit needed | 580 to 620 minimum, depending on lender | Â 620 to 680, depending on lender |
| Common uses | Home repairs, debt consolidation | Â Home improvement, education expenses |
What Is a Personal Loan?
A personal loan is a general-purpose installment loan that typically doesn’t require collateral.
Unlike home equity loans, which have high minimum loan amounts, you can borrow as little as $1,000 with a personal loan. Depending on the lender and your creditworthiness, you could borrow as much as $100,000.
Term Lengths Available
Personal loans are most commonly available in terms of two to seven years. You get your loan proceeds in a single lump sum, then make monthly payments, just like with a home equity loan. Because personal loans also have fixed rates in most cases, your payment stays the same for the whole loan term.
What You Can Use a Personal Loan For
Unless your lender says otherwise, you can use a personal loan however you want. Debit consolidation and home repairs are common uses, but quick approval and funding make personal loans a potentially good choice for any emergency expense that’s too large for a credit card.
Banks, credit unions and nonbank lenders all originate personal loans, which makes them easy to find.
What Is a Home Equity Loan?
A home equity loan is an installment loan you take out against the equity in your home. You can typically borrow anywhere from a minimum of $10,000 to a maximum of 80% or 85% of your home equity — that is, the portion of your home’s value that you own free and clear. If you have a mortgage loan on your home, the home equity loan is a second mortgage.
Term Lengths Available
Loan terms can range from five years to 30 years, depending on the lender and how much you borrow. Your payment stays the same for the entire term because the loans typically have fixed interest rates.
What You Can Use a Home Equity Loan For
You can use a home equity loan for just about any purpose. Many borrowers use it as a relatively low-cost way to finance home improvements, education costs and other major expenses.
Keep in mind, though, that your home secures the loan, so you could lose your home if you’re unable to repay it. That makes home equity loans a poor choice for luxury purchases.
Banks and credit unions originate most home equity loans. You might have to shop a bit to find one, though. Many banks offering home equity products have discontinued installment loans in favor of home equity lines of credit.
How Does a Personal Loan Work?
Here’s what you can expect when you take out a personal loan.
- Apply in person or online. The lender will review your income and credit.
- Once approved, review and sign your loan documents to finalize the loan and receive the funds.
- Begin making your monthly payments.
How Does a Home Equity Loan Work?
Here’s how a home equity loan works.
- Apply for your loan online or in person. The lender will review your income, credit and existing mortgage loans.
- Schedule an appraisal with the lender’s appraiser. The appraisal helps the lender evaluate how much equity you have in your home.
- After the lender approves the loan, review and sign your loan documents to finalize the loan and receive the funds.
- Begin making monthly payments.
Pros and Cons of Each Option
Consider the pros and cons of personal loans and home equity loans as you weigh your options.
Personal Loan Pros
- No collateral needed
- Can borrow as little as $1,000
- Quick approval and funding
Personal Loan Cons
- Rates can be much higher
- Potentially high fees
- Maximum loan amount usually lower than with home equity loan
Home Equity Loan Pros
- Lower rates compared to personal loans
- Consistent, predictable payments due to fixed rate
- Potentially long loan term
- You might be able to deduct the interest
Home Equity Loan Cons
- Home is at risk in the event of loan default
- Long loan term increases total interest and risk of default
- Might have to borrow more than you need because of loan minimums
How To Choose the Right Option for You
Comparing home equity loans and personal loans with real-world situations can help you decide which is best.
| If You… | Go With… |
|---|---|
| Need $10,000 or more | Home equity loan |
| Prefer to borrow smaller amounts as you need them | Personal loan |
| Don’t own a home, or lack significant equity in your home | Personal loan |
| Have good credit | Home equity loan |
| Plan to sell your home in the next several years | Personal loan |
| Plan to use the loan for substantial improvements to your primary or second home and want to deduct your loan interest | Home equity loan |
How To Apply for a Personal Loan or Home Equity Loan
The steps to apply for a home equity loan and personal loan are similar, but processing is more complicated with a home equity loan.
- Order your credit score and a copy of your combined credit report. Resolve any issues that might keep you from being approved for the loan.
- Research lenders, and request rate quotes from a few you like.
- Start an application on your chosen lender’s website. Follow the instructions for submitting your photo ID, recent pay stubs, W-2 or 1099 forms or both, as well as any other documents the lender asks for.
- Watch for your approval notification. Personal loans are often approved right away. Home equity loans often take weeks or longer, especially if the appraisal is delayed.
- Review and sign your loan documents to accept the loan.
- Watch for your check to arrive or for the deposit to hit the account you designed to receive the loan funds. Personal loans can be funded as soon as the same day. Home equity loans could take longer.
FAQs About Personal Loans and Home Equity Loans
Here are answers to some of the most frequently asked questions about home equity loans vs. personal loans.- Which one is easier to get — a home equity loan or a personal loan?
- Personal loans are faster and easier to get, but if you need a large loan, a home equity loan might be easier to qualify for because it's secured by your home.
- Which has lower interest rates?
- Home equity loans usually have lower rates, although some personal loan rates are very competitive for the most qualified borrowers.
- Can I use either for debt consolidation?
- Yes. But if you'll use a personal loan, make sure the rate is lower than rates on the debt you're consolidating.
- How do they affect credit score?
- The net effect is usually beneficial as long as you make your payments on time. However, you might see an initial drop because of the credit inquiry and change in the average age of your accounts.
- Can I switch from one to the other later?
- Although you can't convert one loan type into another, you can use one loan to refinance the other.
Our in-house research team and on-site financial experts work together to create content that’s accurate, impartial, and up to date. We fact-check every single statistic, quote and fact using trusted primary resources to make sure the information we provide is correct. You can learn more about GOBankingRates’ processes and standards in our editorial policy.
- U.S. Bank. 2024. "How does a home equity loan work?"
- Citi. 2025. "What is an Unsecured Personal Loan?"
- IRS. 2024. "Is interest paid on a home equity loan or a home equity line of credit (HELOC) deductible?"
- MyFICO. "What's in my FICO® Scores?"
