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19 Sep 2018

Personal Loans vs Home Equity Loans: Which is Right for You?

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Personal loans can be a really useful tool to help fund all sorts of things – new cars, starting up a business, or remodeling your home.

Let’s hone in on that last point.

Americans were predicted, at the start of the year, to spend 7.5% more on remodeling their homes in 2018 than in 2017.

A great way to secure funding for that type of project is to look at a personal loan which is a little more niche – a home equity loan.

These loans are not quite the same as small personal loans. Let’s take a look at each type of loan, then discuss the merits of each.

Personal Loans

Personal loans are ‘unsecured’ loans. This means that when the money is paid to you, there’s no collateral up for grabs that the lender might be able to foreclose on.

The borrower receives a lump sum of cash to spend as they please. They must then pay regular installments back to the lender, plus interest until the loan is clear.

It’s all pretty straightforward, unless you fail to pay back the loan (‘default’) in which case the lender might take action against you.

These loans are widely available from banks, credit unions, and – increasingly – peer-to-peer lenders. Not sure about the last of these? Peer-to-peer (or P2P) lenders are platforms that let regular people put money up to be lent out to other people for interest returns.

Home Equity Loan

A home equity loan is similar to a personal loan, but not quite the same.

You’ll get a lump sum of money from the lender. Which is more likely to be a bank in this case.

Over time, you must pay back the money borrowed, with interest on top. Which is just like a personal loan – so what’s the difference?

Well, home equity loans are secured on your home, in much the same way as a mortgage loan would be. Or to be pedantic, it’s secured against the equity you have in your home.

So if you’ve paid off $150,000 of a $250,000 mortgage, it’s secured against the $150,000 you’ve paid off. So there are two loans secured on the property: the original mortgage, and the home equity loan.

This type of loan isn’t readily available to renters, since the home you live in doesn’t belong to you. Which means you can’t pin your debt to it.

However, someone who is renting, say, an apartment in New York but has a home in Long Island they decant to for the weekend, could still try to take out a home equity loan on the home they own.

Living in the property permanently is not necessarily a pre-requisite, but criteria are different from bank to bank. You always need to check the rules before applying.

What Can Home Equity Loans be Used For?

Successful borrowers are free to use the money for whatever they feel like.

But since it’s secured on their home, it’s often used to pay for home improvement projects.

Depending on the improvement, the value of their equity in the property can also rise. That helps to act as a buffer against market downturns. And the owner has, in fact, made a ‘profit’ on the loan – even if it’s not in cash.

Though as with all property, the ‘profit’ is not guaranteed to be realized one day. Homes are only ever worth what they’re sold for, at the time they’re sold.

It’s also not unheard of for a homeowner to secure a home equity loan against their main home and using the money to do up a second property. That might be a summer home – or a property they’re looking to flip.

This gives quite a lot of flexibility in situations where a mortgage lender has said ‘no’ to a larger mortgage.

Personal Loans Vs Home Equity Loans

small personal loansThe type of loan you pick is down to your personal circumstances.

Personal loans are less risky in the sense that they’re not tied to something of yours, but that doesn’t mean they’re risk-free – and they definitely still need to be paid off conscientiously.

Home equity loans might be considered riskier since they’re tied to your property. However, borrowers might find that lenders are more open to accepting a home equity loan than a personal loan because of the tangible property asset the loan is tied to.

That’s particularly true for people who have a few marks on their credit reports. They might find it hard to get an unsecured loan, so a secured loan could be the alternative approach they need to get the agreement over the line.

Ultimately, it’s up to the person borrowing money to make this decision. Besides the circumstances of the loan, they should also do all the other checks – rate comparisons, shopping around for the best offer for them, and checking out any associated fees or charges for taking out the loan.

Looking for a Loan?

Whether you’re after a personal loan, home equity loan, or you’re looking for something a little more everyday like a credit card, we can help you find what you need.

Bonsai Finance can introduce you to a number of lenders who may suit your needs, including those who specialize in offering loans to people with a less-than-perfect credit history.

Whether it’s a loan for home improvements, a new car, or something else, use our website to find what you’re looking for, and apply. Our panel of lenders will provide a swift response to your request.