Are personal loans safer than home equity loans?

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You might want to go for a personal loan for a big reason.

Key points

  • Personal loans are unsecured, while home equity loans use your property as collateral.
  • It’s important to keep up with loan repayments no matter what, but you may prefer a personal loan so you don’t put your home on the line.

There may come a time when you need to borrow money, whether it’s to pay bills or renovate your living space. If you are an owner, several options are available to you. You can borrow against your property with a home equity loan, or you can opt for a personal loan. You might want to opt for the latter for one important reason.

Secured vs Unsecured Loans

Some types of loans are secured by specific assets or guarantees. A mortgage, for example, is secured by the house you are borrowing money for. A car loan, on the other hand, is guaranteed by the vehicle it was used to buy.

Home equity loans are considered secured loans, and the asset they are tied to is your home itself. If you take out a home equity loan and fail to meet your payments, your lender could, in an extreme situation, force the sale of your home to make you pay back what is owed to you.

Personal loans, on the other hand, are unsecured loans. With a personal loan, you don’t tie the amount you borrow to any specific asset, which means that if you’re behind on your loan payments, your lender may not have a way to get you back. easily.

It is for this reason that you may want to favor a personal loan over a home equity loan for borrowing purposes. You may pay more interest on a personal loan than on a home equity loan because your lender is taking on more risk. But in exchange, you won’t put your house on the line.

To be clear, there are consequences involved when you fall behind on any loan you take out. Missing your payments could cause serious damage to your credit score, which could, in turn, make it extremely difficult to borrow the next time you need it. But if you’re worried about losing your home because you can’t repay a loan, you can opt for a personal loan.

Are home equity loans easier to get?

You may feel more comfortable taking out a personal loan than a home equity loan. But one thing you should know is that a home equity loan may be easier to get because it’s based on how much equity you have.

Home equity is calculated by taking the difference between the market value of your home and the balance of your mortgage. If your house is worth $300,000 and you owe $200,000 on your mortgage, you have $100,000 of equity. Once a lender sees this, they are likely to feel reasonably comfortable lending you money.

With a personal loan, a lender bases their decision largely on your credit score. And if your score isn’t great, you might have trouble getting approved for a personal loan or getting approved for a great rate. Of course, home equity lenders also consider credit scores. But they carry more weight with personal loans.

What’s the right call?

Borrowing through a home loan might be a bit cheaper than taking out a personal loan. But if you’re worried about your home being used as collateral for a loan, then a personal loan may be a better option for you.

The Ascent’s Best Personal Loans for 2022

Our team of independent experts have pored over the fine print to find the select personal loans that offer competitive rates and low fees. Start by reviewing The Ascent’s best personal loans for 2022.

About Judith J. George

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