Personal loans vs. home equity loans: Which is better now?
High interest rates have driven up borrowing costs over the last three years. That's an unfortunate reality if you have variable-interest debt or want to take out a loan. The tide, however, is beginning to turn.
"There is a near-universal expectation that rates will come down over the remainder of the year as inflation continues to moderate towards the Fed's preferred 2% target and the employment market cools, easing fears of wage-based inflation," says Josh Lewis, certified mortgage consultant with The Educated Homebuyer podcast.
With rate drops on the horizon, borrowing will again become more affordable. But which loan product is best this fall? While home equity loans are likely top of mind if your home value spiked during the pandemic, personal loans are sometimes the better choice. We asked some financial experts for their recommendations, which we detailed below.
See what home equity loan interest rate you could qualify for here now.
Personal loans vs. home equity loans: Which is better now?
The costs of both loan types will come down as rates drop, so whether a personal loan or home equity loan is better this fall will depend on the details of your situation.
When is a personal loan better?
A personal loan may be better in the following scenarios:
- You don't want to put your home at risk: You may prefer a personal loan due to the lien requirements of home equity loans. "If a person defaults on a personal loan, that doesn't have any ramifications for their home, whereas a home equity loan default can jeopardize a person's residence through foreclosure," says Shmuel Shayowitz, president and chief lending officer at Approved Funding.
- You need money fast: Brian Mollo, the chief executive officer of Trusted House Buyers, explains that a personal loan can be a better option when you need funds fast — such as when you're covering an emergency expense. "Personal loans often have faster approval and funding processes, which could be crucial if you need money quickly," adds Lewis.
- You have good credit and want to avoid fees: Home equity loans typically come with closing costs that range from 2% to 6% of the loan amount. Personal loans don't have closing costs but sometimes come with origination fees which can be as high as 12% of the loan amount. However, you may qualify for a personal loan without any fees if you have good or better credit.
- You need to borrow $10,000 or less: "If you need a smaller amount of money for a short period (one to seven years), and you plan to pay it off quickly, the concern of a higher interest rate might be offset by the speed and ease of getting a personal loan," Lewis says. Jeremy Schachter, branch manager at the Fairway Independent Mortgage Corporation, agrees. "If you are looking for a small amount to quickly pay back (under $10,000), I would recommend a personal loan over a home equity loan," Schachter says.
Start exploring the top personal loan options available to you online today.
When is a home equity loan better?
Next, here's when experts say a home equity loan can be better:
- You want the lowest interest rates: "Home equity loans typically offer lower interest rates, around 7% to 9% compared to 10% to 12% or more for personal loans. If rates come down as expected, a home equity loan will likely remain more affordable," Lewis says. Further, you could opt for a home equity line of credit (HELOC) with a variable interest rate and benefit each time rates drop. "In a decreasing rate environment, you can take the variable rate, likely tied to Prime, and enjoy the ride down every time the Fed cuts rates," says Lewis.
- You want lower monthly payments: Home equity loans also tend to have longer repayment term maximums, up to 30 years, while personal loan terms typically fall between one and 10 years. "The longer repayment terms of a home equity loan can make monthly payments more manageable, particularly if you expect rates to decrease and want to keep payments manageable with the hope of refinancing later," Lewis says.
- You have a lot of equity and need a larger loan amount: "Home equity loans can offer access to larger loan amounts, making them ideal if you need significant funds for home improvements or consolidating higher-interest debt," says Lewis. For example, most home equity lenders let you borrow around 85% of your home's value. That could equate to a six-figure sum, depending on how much home equity you've accumulated to date.
The bottom line
The better loan product for you this fall depends on multiple factors. "While a home equity loan usually offers more benefits in terms of lower interest rates and higher borrowing limits, a personal loan can be advantageous in certain situations, particularly when quick access to smaller funds is needed, or when you want to avoid putting your home and equity at risk," Lewis says.
To find the best fit, consider the above factors and run the numbers.
Both personal loans and home equity loans can have large impacts on your financial situation. If you have any questions or want personalized guidance, consider consulting a certified financial advisor. They can help you explore the pros and cons of both options in more depth.
