Personal Loan vs. Home Equity Loan: Which Is Better?

Whether you’re looking to consolidate high-interest debt or you’re facing a large expense or financial project, two of the most common options are personal loans and home equity loans. While both are installment loans, they work very differently and come with distinct pros and cons.

If you’re looking for financing, we’ll break down the differences between personal loans and home equity loans to help you decide which is a better fit for your needs, credit profile, and financial goals. Note that if you’re considering a home equity line of credit (HELOC) instead, check out our personal loan vs. HELOC comparison.

Table of Contents

1. Personal loan vs. home equity loan: At a glance
2. What is a personal loan?
3. What is a home equity loan?
4. How to decide between a personal loan and home equity loan
   1. When a personal loan might be better
   2. When a home equity loan might be better

Personal loan vs. home equity loan: At a glance

Here’s a quick breakdown of some of the major differences between personal loans and home equity loans:

Feature	Personal loans	Home equity loans
Collateral requirement	Generally don’t require collateral	Uses your home’s equity as collateral
Interest rate range	7% – 36%	6% – 18%
Repayment terms	1 – 7 years	5 – 30 years
Typical loan amounts	$250 – $100,000	$10,000 – $1 million+
Upfront fees	0% – 10% of the loan amount	2% – 6% of the loan amount
Approval and funding timeline	1 – 7 days	2 – 8 weeks
Credit score requirement	No universal minimum	Typically 620
Risk of asset loss	Default may result in collection efforts, including a potential lawsuit	Default may result in home foreclosure

For a real-life comparison, here’s a look at two top-rated products—one personal loan and one home equity loan—so you can see the real differences in eligibility requirements, interest rate ranges, and loan structure.

	5.0 View Rates	4.1 View Rates
Rates (APR)	8.99% – 29.99% with all discounts1	Starting at 9.50%
Rates (APR)	Rates (APR)
8.99% – 29.99% with all discounts1	Starting at 9.50%
Loan amounts	$5,000 – $100,000	$25,000 – $500,000
Loan amounts	Loan amounts
$5,000 – $100,000	$25,000 – $500,000
Repayment terms	24 – 84 months	5 – 30 years
Repayment terms	Repayment terms
24 – 84 months	5 – 30 years
Min. credit score	660	680
Min. credit score	Min. credit score
660	680

*Spring EQ is not available in Alaska, Hawaii, Idaho, Massachusetts, Missouri, North Dakota, New York, South Dakota, West Virginia, or Wyoming.

Now let’s dive into the details of how these two products work and which might be right for you.

What is a personal loan?

A personal loan is a type of unsecured loan that allows you to borrow a fixed amount of money and repay it over a set term with a fixed interest rate. Because it’s unsecured, you don’t need to use your home or any other asset as collateral. Personal loans are commonly used for debt consolidation, medical expenses, home improvements, weddings, or other major purchases.

Many banks, credit unions, and online lenders offer personal loans, with popular names including SoFi, LightStream, and Discover. Loan amounts, interest rates, and repayment terms vary depending on your credit score, income, and other factors.

Pros

• No collateral required

  You don’t need to put your home or other assets on the line to get approved, which makes personal loans less risky for borrowers who want to avoid tying debt to their property.

• Fast funding

  Many lenders offer same-day or next-day approval and funding, making personal loans a quick option if you need cash urgently for an emergency or time-sensitive expense.

• Potential for low interest rates

  If you have excellent credit, you may qualify for a low fixed interest rate in the single digits, making it a worthwhile option, even compared to a home equity loan.

Cons

• Higher interest rates than home equity loans

  Since personal loans are unsecured, lenders typically charge higher interest rates than home equity loans, especially if your credit score is average or below.

• Shorter repayment terms

  Repayment terms usually range from one to seven years, which means your monthly payments may be higher compared to loans with longer terms, like home equity loans.

• Lower loan amounts

  You may not be able to borrow as much as you could with a home equity loan, making personal loans less viable for significant financing needs.

What is a home equity loan?

A home equity loan is a secured loan that allows you to borrow against the equity you’ve built up in your home. You receive the loan as a lump-sum payment and repay it over a fixed term with a fixed interest rate. These loans are often used for home renovations, large medical bills, debt consolidation, or education expenses, thanks to their typically lower interest rates and higher borrowing limits.

Because they’re backed by your property, home equity loans generally offer more favorable terms than unsecured options. However, they also carry some additional risks. Common lenders include U.S. Bank, BMO, and Spring EQ.

Pros

• Lower interest rates

  Because the loan is secured by your home, lenders take on less risk and can offer lower rates than unsecured loans like personal loans, especially if your credit score is less than stellar.

• Higher borrowing limits

  You can usually borrow up to 80% to 85% of your home’s appraised value minus your remaining mortgage balance, making home equity loans ideal for funding major expenses.

• Long repayment terms

  Repayment terms can span five to 30 years, allowing for smaller monthly payments and easier budgeting, especially on large loan amounts.

Cons

• Slower approval process

  Getting a home equity loan typically involves a home appraisal, income verification, and more paperwork, which can slow down the funding timeline compared to personal loans.

• Risk of foreclosure

  Because your home secures the loan, missing payments could lead to foreclosure, making this a riskier option if your financial situation is unstable.

• Only available to certain homeowners

  If you’ve recently purchased your home or haven’t built much equity, you may not qualify or may only be eligible for a small loan amount.

How to decide between a personal loan and home equity loan

If you’re torn between the two options, the table below breaks down key questions to help you choose the right path:

Question	Personal loan	Home equity loan
What’s the loan for?	Ideal for small to moderate expenses or quick fixes	Better for large, planned costs like home improvements
Do I own a home with equity?	Not required	Requires 15% – 20% equity in your home
Can I risk losing my home?	No collateral required, so less risk to assets	Your home is collateral—defaulting could lead to foreclosure
How quickly do I need the money?	Often funded within a day or two	Typically takes several weeks due to appraisal and underwriting
What’s my credit score?	Great credit needed for best rates	May offer better rates even with fair credit since it’s secured

When a personal loan might be better

It’s important to consider your needs, financial goals, and credit standing to determine if a personal loan is right for you. That said, here are some scenarios where it could make sense:

• You don’t own a home or don’t want to use it as collateral: Personal loans are unsecured, so they don’t require homeownership or put your property at risk if you can’t repay.
• You need funds quickly: Many personal loan lenders offer same-day or next-day funding, making them ideal for emergencies or time-sensitive expenses.
• Your credit is strong enough to qualify for low rates: Borrowers with excellent credit can often secure competitive rates without needing to put up collateral.
• The expense is small to moderate: For smaller financing needs, a personal loan is often sufficient and more straightforward.
• You’re already using your equity for something else: If you’ve tapped into your home equity for another loan or line of credit, a personal loan can provide additional funding without overleveraging your property.

When a home equity loan might be better

As with a personal loan, the decision to take on a home equity loan is a personal one. However, there are some general situations where it could make more sense:

• You need a large loan amount: Home equity loans typically offer higher borrowing limits than personal loans, making them better for big-ticket expenses like renovations or tuition.
• You have strong equity in your home: If you’ve built up significant equity, you can leverage it to access lower-cost borrowing than most unsecured loans allow.
• You want lower interest and a longer repayment term: Home equity loans usually come with lower fixed rates and extended terms, helping to keep monthly payments manageable.
• You’re confident in your ability to repay: Because your home is on the line, it’s crucial to feel financially stable and confident in your repayment ability before borrowing.
• You’re using the loan for home improvement: If used for qualifying renovations, the interest on a home equity loan may be tax-deductible, providing additional savings.

I have typically recommended home equity loans over personal loans. For folks with a 401(K), a 401(K) loan is another option which also allows the borrower to pay the interest to themselves.

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Both personal loans and home equity loans have their advantages, but the right choice depends on your financial goals, homeownership status, and risk tolerance. Take time to compare offers, read the fine print, and assess what works best for your budget and timeline.

¹SoFi Platform personal loans are made either by SoFi Bank, N.A. or , Cross River Bank, a New Jersey State Chartered Commercial Bank, Member FDIC, Equal Housing Lender. SoFi may receive compensation if you take out a loan originated by Cross River Bank. These rate ranges are current as of 3/06/23 and are subject to change without notice. Not all rates and amounts available in all states. See SoFi Personal Loan eligibility details at https://www.sofi.com/eligibility-criteria/#eligibility-personal/ . Not all applicants qualify for the lowest rate. Lowest rates reserved for the most creditworthy borrowers. Your actual rate will be within the range of rates listed above and will depend on a variety of factors, including evaluation of your credit worthiness, income, and other factors.

Loan amounts range from $5,000– $100,000. The APR is the cost of credit as a yearly rate and reflects both your interest rate and an origination fee of 9.99% of your loan amount for Cross River Bank originated loans which will be deducted from any loan proceeds you receive and for SoFi Bank originated loans have an origination fee of 0%-7%, will be deducted from any loan proceeds you receive.

Autopay: The SoFi 0.25% autopay interest rate reduction requires you to agree to make monthly principal and interest payments by an automatic monthly deduction from a savings or checking account. The benefit will discontinue and be lost for periods in which you do not pay by automatic deduction from a savings or checking account. Autopay is not required to receive a loan from SoFi.

Direct Deposit Discount: To be eligible to receive an additional (0.25%) interest rate reduction on your Personal Loan (your “Loan”), you must set up Direct deposit with a SoFi Checking and Savings account offered by SoFi Bank, N.A., or enroll in SoFi Plus by paying the SoFi Plus Subscription Fee, all within 30 days of the funding of your Loan. Once eligible, you will receive this discount during periods in which you have enabled Direct Deposit to an eligible Direct Deposit Account in accordance with SoFi’s reasonable procedures and requirements to be determined at SoFi’s sole discretion, or during periods in which SoFi successfully receives payment of the SoFi Plus Subscription Fee. This discount will be lost during periods in which SoFi determines you have turned off Direct Deposit to your Checking and Savings account or in which you have not paid for the SoFi Plus Subscription Fee. You are not required to enroll in Direct Deposit or to pay the SoFi Plus Subscription Fee to receive a Loan.