Home equity loan vs personal loan

Big financial decisions like remodeling your home or consolidating credit card debt can feel overwhelming. However, there are some financing options that may help you achieve these goals head-on, including home equity loans and personal loans.

Choosing a home equity loan vs personal loan

Research and planning are important when considering a home equity loan or a personal loan:

• Determine how much money you need to achieve your goal.
• Review existing bills and debts to get a sense of what payment amount you may be able to afford.
• Consider talking to a financial planner about your options.

Key features of a home equity loan vs personal loan

Home equity loans are secured loans that use your home as collateral. They let you pull cash from the equity you've built up in your home. 

Most personal loans are unsecured loans, which typically have higher interest rates than secured loans. 

Discover® Home Loans offers home equity loans from $35,000 to $300,000 (2nd Lien) with $0 application fees, $0 origination fees, $0 appraisal fees, and $0 costs due at closing.

You can compare these to personal loans from Discover, which may come with different rates, terms, and borrowing limits. 

It's always a good idea to evaluate your options to decide what works best for you.

Tap into your home equity

Home equity loans are one way to finance home renovations and other large expenses. They can also be used to consolidate debts. Often ideal for long-term needs, home equity loans may be a good option depending on your financial goals.

Benefits of home equity loans

• Potential tax break: The Home Mortgage Interest Deduction Publication states that you may be able to deduct all or some of the interest you pay on a home equity loan from your taxable income. To be eligible, you must use the borrowed funds to "buy, build, or substantially improve" the property that secured the loan. Consult a tax advisor to learn more.
• Cash for big purchases: Secured loans like home equity loans may have higher borrowing limits than unsecured loans because they use your home as collateral. Whether you need a new roof or want to finance a dream wedding, a home equity loan may provide the cash you need. 
• Low interest rates: Secured loans such as home equity loans typically come with a lower interest rate than unsecured loans.

Risks of home equity loans

• Risk of foreclosure: Because your home serves as collateral for the loan, not making payments on a home equity loan may put your property at risk of foreclosure.
• Reduced home equity: When you take out a home equity loan, it may reduce the amount of available equity you can tap into. 

Taking out a personal loan

Personal loans could be used for various purposes, including debt consolidation and paying for a wedding. You may also be able to use a personal loan for home improvements.

Benefits of personal loans

• No collateral required: Unlike a secured loan, an unsecured personal loan typically doesn't require any collateral like your home. 
• Quick cash: A lender doesn't have to assess home equity for an unsecured personal loan, so you may receive funds faster than with a home equity loan. 

Risks of personal loans

• High interest rates: Since unsecured personal loans are not backed by collateral, lenders may view them as riskier than secured loans and charge higher interest rates as a result.
• Credit score damage: You won't directly risk losing your home with an unsecured personal loan. However, the loan may end up in collections if you don't make payments, potentially damaging your credit score.