Are Personal Loans More Secure Than Home Equity Loans?

A man and a woman are standing in the open doors of their car parked on the side of a forest road.

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You may want to favor a personal loan for a big reason.

Basic points

  • Personal loans are unsecured, while mortgages use your property as collateral.
  • It’s important to keep track of the miles you have and if and when they expire.

There may come a time when you will need to borrow money, whether it is to pay off some bills or to renovate your living space. If you are a homeowner, you have several options. You could also use a home equity loan to get a home equity loan. You may want to go with the latter for an important reason.

Secured against unsecured loans

There are certain types of loans that are secured by specific assets or collateral. A mortgage, for example, is secured by the home you lend money to finance. A car loan, meanwhile, is secured by the vehicle used to assist in the purchase.

Mortgage loans are considered collateral loans and the asset to which they are linked is your own home. If you take out a mortgage and do not keep your payments, your lender could, in an extreme case, force the sale of your home to repay the amount owed.

Personal loans, meanwhile, are unsecured loans. With a personal loan, you do not link the amount you are borrowing to a particular asset, which means that if you fall behind on your loan payments, your lender may not have an easy way to repay it.

This is why you may want to opt for a personal loan over a home equity loan. You may pay more interest on a personal loan than on a home loan because your lender takes on more risk. But in return, you will not put your home in danger.

To be clear, there are consequences when you are lagging behind in any loan you take out. Failure to make your payments could cause serious damage to your credit score, which in turn could make borrowing extremely difficult the next time you need it. But if you are worried about losing your home because you can not repay a loan, then you may want to choose a personal loan.

Is Mortgage Loans Easier To Pay?

You may feel more comfortable getting a personal loan than a home loan. But one thing you should know is that a home equity loan may be easier to approve as it is based on the equity you have.

Housing equity is calculated by taking into account the difference between the market value of your home and the balance of your mortgage. If your home is worth $ 300,000 and you owe $ 200,000 to your mortgage, you have $ 100,000 in equity. Once the lender sees this, it is convenient to feel comfortable lending you money.

With a personal loan, a lender will base its decision heavily on your credit score. And if your score is not good, you may find it difficult to get a personal loan or a good interest rate. Of course, home equity lenders also take credit scores into account. But they do carry more weight with personal loans.

What is the right call?

Lending through a home equity loan can be a little less expensive than getting a personal loan. But if you are worried about your mortgage being secured by a mortgage, then a personal loan may be the best choice for you.

The best personal loans of The Ascent for 2022

The Ascent team looked at the market to bring you a short list of the best personal loan providers. Whether you want to repay your debt faster by lowering your interest rate or need some extra money to make a big purchase, these best-in-class options can help you achieve your financial goals. Click here to see the full presentation of The Ascent’s top picks.

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