Home Equity Loans vs. Personal Loans

Which Is Right for You?

When you need to borrow money, your credit union may offer several options—most commonly a home equity loan (or a home equity line of credit, known as a HELOC) and a personal loan. At first glance, they may seem similar, but there are some key differences that can affect your decision. Understanding how each works—and the risks involved—can help you make a more informed financial choice.

The Key Difference: Secured vs. Unsecured

The biggest distinction between a home equity loan (or HELOC) and a personal loan is whether the loan is secured or unsecured.

A personal loan is unsecured, meaning you don’t have to put up any collateral to get it. The lender extends credit based on your income, credit history, and overall ability to repay. If you fail to make payments, your credit score will take a hit, and you could face collection efforts—but you won’t lose your assets.

A home equity loan or HELOC, on the other hand, is secured by your home. These loans use your home’s equity—the portion of your home that you own outright—as collateral. If you fail to repay the loan, the lender could foreclose on your property. In other words, you’re literally putting your home on the line.

Interest Rates and Terms

Because personal loans are unsecured, they generally come with higher interest rates than home equity products. Lenders charge more to compensate for the added risk of not having collateral.

Home equity loans and HELOCs tend to have lower interest rates, often close to mortgage rates, because they’re backed by your home. This makes them an appealing option for borrowers with substantial equity who want to save on interest costs.

Additionally, loan terms can differ. Home equity loans usually offer longer repayment periods—often 10 to 20 years—while personal loans typically range from 2 to 7 years. Longer terms can make monthly payments more manageable, but you may pay more in total interest over time.

Loan Structure: Lump Sum vs. Line of Credit

With a home equity loan, you receive a lump sum of money upfront and repay it in fixed monthly installments. It’s a good choice for one-time expenses such as home renovations, medical bills, or debt consolidation.

A home equity line of credit (HELOC) works more like a credit card—you’re approved for a maximum amount and can borrow, repay, and borrow again during a set “draw period.” This flexibility makes HELOCs useful for ongoing projects or unpredictable expenses.

A personal loan, like a home equity loan, is also typically disbursed as a lump sum with a fixed repayment schedule and interest rate. It’s ideal for borrowers who need a specific amount of money for a defined purpose—such as covering major purchases, consolidating high-interest debt, or paying for education expenses.

Risks and Considerations

Before choosing a home equity loan, it’s critical to remember the risk to your home. Defaulting on a home equity loan or HELOC could lead to foreclosure. Even if you make payments on time, borrowing against your home reduces the equity you’ve built—equity that could otherwise serve as a cushion in tough times or help you profit when selling your house.

With personal loans, the risk is limited to your credit rating and financial reputation. While missed payments can hurt your credit score and lead to collections, your home and other property aren’t at immediate risk.

When to Choose Which

• Choose a home equity loan or HELOC if:
  You have significant equity in your home, you’re confident in your ability to repay, and you want the benefit of lower interest rates. This can be a smart move for major expenses that add value, like remodeling your kitchen or consolidating high-interest debt.
• Choose a personal loan if:
  You don’t own a home, don’t want to use your home as collateral, or only need a smaller loan amount. Personal loans are also a better option for borrowers who want to simplify their debt without taking on the long-term commitment of a second mortgage.

The Bottom Line

Both home equity loans and personal loans can be valuable financial tools—but they serve different needs and carry different risks. A home equity product may save you money with lower rates, but it ties your debt to your home. A personal loan costs more in interest but keeps your property protected.

Before deciding, you will want to compare interest rates, repayment terms, and your comfort level with risk. Reach out to a Town & Country FCU loan officer to discuss your options and help you choose the one that best fits your financial situation at info@tcfcu.com, by calling 1-800-649-3495, or scheduling an appointment here.