Personal Loan Vs. Housing Equity Loan – Forbes Advisor

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When it comes to flexible, affordable and widely available loan products, it is difficult to get a personal loan or a home loan. But how do you know which one to choose?

This answer depends on a number of variables, many of which have to do with your specific financial situation. We will analyze the pros and cons of both types of loans so that you have a better idea of ​​what is right for you.

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What is a personal loan?

Personal loans are unsecured loans that do not require collateral — something that secures the loan and the lender can recover it if you are unable to repay it. Mortgages, home equity loans and car loans, where the loan is directly linked to an asset, are examples of secured loans.

You can use personal loans for a variety of different expenses, such as:

  • Debt consolidation
  • Wedding expenses
  • Home improvement
  • Medical expenses
  • Financing a big market like a boat or a car

The repayment terms of personal loans range between one and seven years, depending on the lender. In general, the longer the term, the higher the interest rate. Most personal loans have fixed interest rates between 4% and 36%. In addition, the limits usually range from $ 500 to $ 50,000, but some providers lend up to $ 100,000.

Both the interest rate and the amount you can borrow depend on your credit score, your income and any other outstanding debts.

How personal loans work

Once you have applied for a personal loan, it usually takes a few minutes to a week for you to make a decision, depending on your lender. Lenders usually require a minimum credit score of 660 and may also have an annual income threshold to be met by the borrower.

If approved, the lender will transfer your money to your bank account as a lump sum, usually within a few days. The repayment starts immediately after the loan is disbursed and you pay interest on the full amount of the loan, whether you use all or part of it.

Some lenders will also charge personal upfront and prepayment costs, but this varies from lender to lender.

Related: 5 Personal Loan Requirements You Need To Know Before Applying

When to Choose a Personal Loan

A personal loan works best if you only need to borrow a few thousand dollars and you want a hassle free loan application process. You may also qualify for a low interest rate if you have excellent credit. In addition, if you do not have equity in your home, then you will not qualify for a equity loan, making a personal loan the right choice.

Related: Best personal loans

What is a home equity loan?

A home equity loan is a secured loan that uses the accumulated equity in your home — the current market value of your home less the rest of the mortgage — as collateral. Most lenders require you to have at least 15% to 20% home equity and a minimum credit score of 620. You can borrow up to 85% of your equity and repay it in five to 30 years.

How home equity loans work

If you have at least 15% to 20% equity in your home, you may be eligible for a home equity loan. Homeowners can contact their mortgage lender or other mortgage broker and apply for a home equity loan. When closing, you will usually have to pay commissions and closing costs between 2% and 5% of the total loan amount. Some lenders may waive these additional costs.

The mortgage is secured by your home, making it secondary to the mortgage. The loan is then disbursed as a lump sum and you have to pay interest on the entire balance of the loan. Because your home is securing the loan, the lender may block you if you fail to make timely payments.

When to Choose a Home Equity Loan

If you do not qualify for a low interest rate personal loan and you have enough equity in your home, consider a home equity loan. Because mortgages use your home as collateral, interest rates are lower than personal loans.

If you use the proceeds for a home repair or remodeling project, you can deduct from your taxes any interest paid on the home equity loan, which is not an option with a personal loan.

Related: Best Mortgage Lenders

Advantages and disadvantages of personal loans

Advantages of personal loans

  • Approval takes less time than a mortgage.
  • There is no risk of recovery of any assets by the bank in case of default.

Disadvantages of personal loans

  • Interest rates can be high, depending on the amount you borrow and your credit score.
  • Some lenders charge prepayment penalties if you repay the loan in advance.
  • Repayment terms are lower than mortgages, which means monthly payments can be higher.

Advantages and disadvantages of home equity loans

Advantages of home equity loans

Disadvantages of home equity loans

  • Failure borrowers may recover their home.
  • It may take a few weeks to receive money, similar to closing a house.
  • Some lenders have high minimum loan amounts, which may be more than you need.
  • Closing costs are often high.

Alternatives to personal loans & home equity loans

If you need cash, there are other options besides a personal loan or a home equity loan.

Credit cards

Borrowers who do not need a lot of money should consider a credit card, especially if they qualify for an interest-free financing card. These offers usually last for six months or up to 21 months. Any outstanding balances at the end of the offer period will start accruing interest until they are paid in full. Even if you can not repay the entire balance within this time frame, you may pay less interest than if you took out a personal home equity loan or equity loan.

Credit cards also provide more flexibility because the minimum payment is almost always much lower than it would be for a personal loan or a equity loan. For example, if you lose your job or face an emergency, it is easier to afford a minimum credit card payment than a personal loan or home equity loan.

If you need cash access, you can get a cash deposit with your credit card. However, the card provider will usually charge a cash deposit, usually between 3% and 5% of the transaction amount, in addition to the annual cash advance rate (APR). Interest on cash on delivery will be accrued immediately. Cash deposit rates are higher than a regular credit card transaction, often up to about 30% APR.

Housing equity credit line

Like a home equity loan, a home equity credit line (HELOC) uses your home equity as collateral. However, instead of a lump sum, HELOC gives you a limit that you can use depending on your needs.

HELOCs consist of two parts: the draw period and the repayment period. The lottery period refers to when you have access to the money. During the lottery period, the borrower is only responsible for paying interest on the money borrowed. Once the lottery period is over, usually after 10 years, the repayment period begins. The repayment period usually lasts 20 years and the borrower has to pay monthly payments on the capital and interest he has borrowed.

Like mortgages, HELOCs come with closing, appraisal and origin fees and you need between 15% and 20% equity in your home to qualify.

401 (k) Loan

If you have a current 401 (k), you can borrow from the balance and use the funds to pay off debt, go on vacation or complete a home repair. The maximum amount you can borrow is $ 50,000 or 50% of your secured balance, whichever is lower.

Unlike other types of loans, a 401 (k) loan does not have a minimum credit score or income requirement. Interest accrued on a 401 (k) loan will be credited to your account as you pay interest yourself.

Only investors who are confident in their job security should take out a 401 (k) loan. If you get fired or fired, you will have to return the money the next tax day or before. If you can not afford it, the balance will be counted as a withdrawal. Borrowers under the age of 59.5 will owe a 10% fine and income taxes.

Redemption by redemption

If you have at least 20% equity in your home, you can refinance and withdraw the excess equity in your home. You can use this cash for many different reasons, such as repaying other loans, renovating your existing home, or buying another property.

When you complete a redemption refinancing, you will receive a new mortgage with a different term and interest rate. The total balance will also be higher than the previous balance and you may end up with a higher monthly payment if interest rates are higher now than when you first took out the loan.

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