If you need to borrow money, a personal loan could be a better choice for a basic reason
- With both a personal loan and a home loan, you can use your loan proceeds for any purpose.
- While you may have a lower interest rate on a mortgage, you run the risk of losing your property if you can not make your payments.
There may come a time when you need to borrow money, whether it’s going to repair your car, or pay a big medical bill, or cover another surprise. The good news is that there are a number of loan products that allow you to borrow money for any reason. These include personal loans and equity mortgages.
You will often receive a lower interest rate on the amount you borrow when you take out a home equity loan than a personal loan. If you own a property with several equity funds, a equity loan may also be easier to qualify for.
However, you may feel more comfortable getting a personal loan. Here’s why.
When you do not want to endanger your home
Personal loans are unsecured loans. This means that they are not backed by a specific type of collateral.
Mortgages, for example, are mortgages that are backed by home equity financing. If you do not keep up with your mortgage payments, you may be at risk of losing your home. But if you fall behind on your personal loan payments, you will not risk losing a particular asset.
Mortgage equity loans work just like mortgages in this respect. When you take out a home equity loan, it is secured by your own home. If you fall behind on your loan payments, you may risk losing your home.
For this reason you may want to consider taking out a personal loan the next time you need money. That way, you do not put yourself in a position where you could risk losing your home.
Be careful when borrowing with a personal loan
Although personal loans are not secured and you may think the damage will be less severe if you are left behind in one, you should be aware that failing to keep up with a personal loan could cause great damage to your credit score. Once this happens, it can become quite difficult to borrow money if needed.
Also, with a personal loan, the higher your credit score at the time of your application, the lower the interest rate you are likely to receive on your loan. If your credit score is not in the best condition, you may get stuck with a higher interest rate which makes it more difficult to manage your loan payments.
Home equity lenders also look at applicants’ credit scores. But because home equity loans are secured, you may have an easier time qualifying for one with a credit score that is not the best. This means that you can achieve a more favorable interest rate with a home loan.
If you fall behind on a home equity loan, your lender could eventually force you to sell your home. These lenders are generally more interested in the amount of equity you have and less in what your credit score looks like.
Should You Choose A Personal Loan Or A Mortgage?
Regardless of the loan product you use to borrow money, it is important to keep track of your payments. If you’re not sure you can do this, it may be best to delay your loan application or find another way to meet your need for money.
That said, the idea of a personal loan may suit you better than the idea of a home equity loan. If so, make some price purchases before signing up for a loan to keep your payments as manageable as possible.
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.