Personal Loans vs. Home Equity Loans: Which Is Right For You?

Be it emergencies like hospitalisation or large expenses such as wedding, or even debt consolidation, personal loans can be the solution in such situations. But do you know banks and non-banking finance companies also offer home equity loans, which can also be opted to meet some of large expenses.

Both these loans have their benefits, depending on the funding requirements. However, each has its own qualifying and eligibility conditions. Let us understand the key differences.

One of the biggest differences between personal loans and home equity loans is the requirement of collateral. Personal loans are unsecured in nature, which means borrowers do not have to give any collateral. On the other hand, home equity loans are secured in nature because the loan is given based on the equity on your property, both residential as well as non-residential. Hence, the property is the collateral. It is also known as a home equity installment loan or second mortgage.

Simply put, home equity loan is given based on the difference between market value of home and any liabilities towards the same property. Suppose, if the value of the house is Rs 30 lakh and you have a pending home loan of Rs 20 lakh, then the equity on the property is Rs 10 lakh. In case, there is no pending home loan or any other liability on the property, then current market value, determined by an appraiser appointed by the lending institute, is considered.

Another difference between the two loans is the rate of interest and repayment period. Personal loans typically have higher interest rates because there is no requirement on collateral or security. The repayment period is also shorter. Comparatively, home equity loans have lower interest rates because lenders have the option of selling the collateral, which is the property in case of default. In addition, borrowers get a longer repayment tenure.

Eligibility criteria for both these loan products are also different. To avail personal loans, the borrower needs to have a good credit score because that is the most important factor considered by lenders to review your application. Those with high credit scores are also in the position to bargain for lower interest rates. Moreover, in many cases, borrowers are often offered pre-approved loans by banks based on their transaction history.  Home equity loans, on the other hand, can also be taken by borrowers with lower credit scores because lenders have comfort over the security.

In both cases, repayment is on the basis of fixed rates but the interest rate varies from lender to lenders.

After considering the differences, borrowers need to take a call based on the amount of loan that is required, assessment of the monthly installments, including cash flows, credit worthiness, etc. Here is a checklist to help you choose between personal loan and home equity loans.

When To Choose Personal Loans

Small Amount –

If the money needed is not too large, borrowers can consider personal loans. As interest rates are higher, EMI on large personal loan amounts will also be equally higher. This also has to be paid in a shorter period of time. In the case of a small amount, the repayment can be done in a matter of a few years.

Urgency –

Personal loans are solely based on credit scores. Those with good credit scores and relevant documents, can quickly get these loans. These customers also have the opportunity to bargain for lower interest rates. Most people may also have a pre-approved personal loan offer from their existing banks.

Risk –

There is no collateral given to take a personal loan. This is not the case in home equity loans, where the property is the collateral. In case of default, the borrower stands to lose home ownership.

Low Equity On Home –

In case the equity on your property is not much, personal loan can be opted instead of settling for a lower amount.

When To Choose Home Equity Loans

Large Loan Amount –

Borrowers in need of large loan amount for say renovation of house can opt for home equity loans provided they have good equity available. Lower interest rate and longer repayment tenure can help them borrow large sums by keeping the property as collateral.

Lower Credit Score –

Borrowers with weak credit history can opt for home equity loans because of the collateral.

Low Interest Rate –

EMI for home equity loan is lower because of lower interest rate. This can help borrowers save their hard-earned money.

Conclusion

Both personal loans and home equity loans have their pros and cons. Borrowers need to take a call on choosing among them based on the requirement and monthly income as well as repayment capacity.

IIFL Finance provides an easy process for all types of loans it offer with only the most basic documentation and competitive interest rates. IIFL Finance processes a personal loan application within a few minutes. If the loan application and documents check out, the company credits the money into the borrower’s account within short period.