Home Equity Loans vs. Personal Loans

Home equity and personal loans offer a lump-sum payout with fixed monthly repayments. Still, critical differences between them may affect which product will meet your financial needs. Read on to learn more about the benefits and differences between home equity and personal loans.

The Basics of Home Equity Loans

A home equity loan is often called a second mortgage because it uses your home as collateral for the loan itself. They’re a popular choice among homeowners looking to fund home repairs, upgrades and renovations. However, you can also use them to pay for some expenses unrelated to your home.

The home equity loan application process lasts longer than the personal loan process but involves similar eligibility criteria.

Eligibility Requirements

These are some of the different factors that lenders consider when evaluating your loan application:

  • Home equity: To be eligible for a home equity loan, you will need a minimum of 20% equity in your home.
  • Creditworthiness: Borrowers with better creditworthiness typically get the best interest rates. However, one of the benefits of home equity loans is that even people with lower creditworthiness may be able to apply. Note that credit requirements may differ from lender to lender.
  • Income: Your income helps lenders determine your repayment ability. You may need to submit pay stubs or tax returns as proof of your income. Some lenders may have minimum annual or monthly income requirements. Verify these requirements when researching different lenders.

The Approval Process

A home equity loan’s application and approval processes are similar to a mortgage. Borrowers can start by checking how much home equity they have, after which it may be easier to compare lenders and rates. Once you decide on a lender, submit an application and any documentation the lender requires. The approval process for a home equity loan involves underwriting and an appraisal of your home, so borrowers must wait until these details are final to receive the funds.


You can repay a home equity loan in fixed monthly installments over a period determined by the lender. The lender will consider your monthly income and creditworthiness for a suitable repayment plan.

Using a Personal Loan

personal loan is an unsecured loan available to borrowers who meet the lender’s creditworthiness and income requirements. Personal loans don’t require any collateral, so you don’t have to worry about losing your house or car even if you miss a payment.

The Benefits

Personal loans have convenient benefits for anyone financing home improvement projects.

  • Easy availability: Personal loans are faster and more secure than other options. They require little paperwork, and you can usually apply for a loan online. Some lenders process personal loans within a day or two.
  • No collateral: One of the main benefits of personal loans is that they don’t require collateral. However, you still risk damage to your creditworthiness if you don’t make timely monthly payments.

The Drawbacks

As with any loan, personal loans may come with potential downsides, such as:

  • Lower loan amounts with higher rates: Personal loans are ideal for borrowers with good credit but may prove expensive for other borrowers.
  • No tax benefit: If you get a personal loan for your home renovations, you won’t receive any tax benefits, as your loan interest is not tax deductible.

Applying for a Personal Loan

Because they require home appraisals, personal loan applications are typically more straightforward than home equity loan applications.

Eligibility Requirements

Lenders may decide your personal loan eligibility on these factors:

  • Creditworthiness: Since personal loans don't include collateral to mitigate risk for the lender, lenders partly rely on the applicant's creditworthiness to assess a borrower’s eligibility.
  • Income: Lenders may have fixed requirements for a loan applicant’s income. Some lenders may have annual income requirements as low as $10,500.

The Approval Process

Personal loans typically have a quick approval process. Many lenders accept online applications and promptly inform you of approval. Depending on the lender, you may receive the funds you need within just a day or two.


You repay personal loans in fixed monthly installments over a predetermined loan term. Usually, repayment begins once the money is disbursed, and payments continue till the end of the loan term.

How to Choose between a Home Equity Loan and a Personal Loan

When choosing between home equity and personal loans, consider these criteria before making a decision:

  • Credit: If you have good credit, you may want to avoid the risk of a collateral loan altogether and stick with a personal loan.
  • The type of expense: Urgent expenses such as damaged plumbing or car repairs require immediate action. In such cases, a personal loan may be the faster and more efficient option. On the other hand, a long-term project such as a kitchen or bathroom renovation may make more sense for a home equity loan.
  • Cost of the renovation: The estimated project cost is also a major factor. For a home equity loan, you can only borrow as much as you’ve paid off in home equity. So, you will need to build adequate equity before applying. Alternatively, your expenses could fall within the range of amounts offered by personal loan lenders. 

Disclaimer: Citi offers personal loans to both existing Citi customers and new Citi customers that meet specific eligibility criteria, including an established credit and income history along with additional factors determined by Citi. If you think you could benefit from a Citi Personal Loan, apply online today.

Disclosure: This article is for educational purposes. It is not intended to provide legal, investment, or financial advice and is not a substitute for professional advice. It does not indicate the availability of any Citi product or service. For advice about your specific circumstances, you should consult a qualified professional.

Additional Resources

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