Home Equity Loan vs. Personal Loan: What’s the Difference?

Home Equity Loan vs. Personal Loan What’s the Difference

Home equity loans and personal loans are two very common kinds of loans which are opted for by people to meet their financial requirements. Whether it is investing the funds somewhere or spending them for any purpose, these loans are very helpful. However, both of these loans have a set of similarities and differences which may go unnoticed by people. In order to ensure you choose the right loan option for your needs, it is vital to know these details, which we will discuss in the following article.


Similarities Between Home Equity Loans and Personal Loans

Before finding out how home equity loans and personal loans are different from each other, it is essential to understand their similarities. It is because of the various similarities that people tend to get confused between the two loan types when choosing which one to choose. The following are the main similarities between the two types of loans.


Purpose of the Loan

Both home equity loans and personal loans are versatile in their use. This means that they can be used by the borrowers for any purpose they need to fulfill. Borrowers can choose to use the disbursed funds for paying off other debts, paying their bills such as medical bills, use the money for education, purchasing big things, or anything else. These funds can also be used for investing in property, home improvements, investing in stocks, etc.


Amount Disbursement

Both home equity loans and personal loans are disbursed as lump sum amounts to the borrowers directly. By getting the funds at once, borrowers can effectively use the funds for big purchases and investments easily. They can also choose to divide their spendings as they like as per the amount they need for various purposes.


Fixed Terms

Both home equity loans and personal loans come with fixed terms with regards to the loan period and the rate of interest. By means of such fixed terms, both of these loans offer borrowers a sense of peace and control because they can easily plan for their financial futures without any scope for adversarial changes.

Since the payments throughout the period of loan repayment will be the same, the borrowers can plan other expenses and investments around it so that they have ample funds to pay the loan back without defaulting, and can also build their futures the way they want.


Differences Between Home Equity Loans And Personal Loans

Despite the numerous similarities between the two kinds of loans, there are a whole bunch of differences between them as well. These differences should be taken into account in alignment with a borrower’s personal financial goals in order to understand which is the best option to meet their needs without compromising their financial stability. The following are the core differences between home equity loans and personal loans.


Qualification Parameters

A home equity loan tends to have tougher eligibility criteria and requirements as compared to a personal loan. This is because a home equity loan is given for a much bigger amount of money than a personal loan, and the lender stands to lose more in this case.


Rate Of Interest

One of the biggest differences between home equity loans and personal loans is the rate of interest that is charged against the loans sought by the borrower. Home equity loans are known for their low rates of interest. In fact, compared to personal loans, home equity loans offer much lower rates of interest against the loans, meaning that the borrower would have to pay much less overall.

This can be a significant advantage based on the loan amount that one wants.


Amount of Loan

Through a home equity loan, a borrower’s limit of loan is determined by the amount of equity they own in the house. The equity is determined by subtracting the amount of mortgage they have paid from the current value of the house. Once this value is found, the maximum loan amount is determined which can easily be in hundreds of thousands of dollars.

On the contrary, a personal loan is typically offered for much less amounts, usually ranging between $500 to $40,000. The exact limits can vary between different lenders, but it is usually restricted within $50,000.


Loan Repayment Terms

Another significant difference between home equity loans and personal loans is that their repayment duration is significantly different. A home equity loan typically has a longer period of repayment as compared to a personal loan. The exact term of the loan would vary depending upon several factors.

A personal loan, on the other hand, is known to be a short-term loan that lasts between 3 years to 5 years. In some cases the loan can extend to 7 years depending upon the unique policies of the lending institution.



A personal loan is flexible in terms of collateral. It is in general a loan (unsecured) which means that there is no need for collateral by the lending financial institution against the loan. This means that the borrower does not need to provide anything which they can stand to lose in case they are unable to repay the loan. However, a personal loan can also be secured. This is particularly helpful if the borrower’s application is otherwise weak.

A home equity loan, however, is always a secured one and the borrower’s house stands as collateral against the loan. In case they default on the loan, they can lose the house.



Since a home equity loan is secured, in case of borrower’s default, the lender can proceed with foreclosure processes. Through this, they gain control over the collateral and get the authority to sell it to recoup their losses.

In case of a personal loan, because they are usually unsecured, foreclosure proceedings do not typically exist.



With so many differences between them, borrowers should be careful and honestly assess their requirements before choosing either kind of loan. If their requirements do not exceed the maximum amount given in personal loans, it should be the option to choose to avoid risking your home because of wasteful spendings.