Home Equity Loans vs. Personal Loans

How do home equity loans work?

A home equity loan lets you borrow against the equity you’ve built in your home (that’s the home’s market value minus what you still owe on your mortgage). Because a home equity loan is a secured loan – you use your home as collateral – interest rates can be lower than for a personal loan.

Home equity loans are a popular choice among homeowners looking to fund home repairs, upgrades and renovations. However, you can also use them to pay for non-home expenses.

The home equity loan application process takes longer than the personal loan process and has some differences in eligibility criteria. 

Eligibility

Here are some factors lenders consider when evaluating your home equity loan application:

• Home equity: To be eligible for a home equity loan, you typically need a minimum of 15% to 20% equity in your home.  Lenders may allow you to borrow up to 85% of your home’s equity.
• Credit Score: As with most loans, borrowers with higher credit scores typically qualify for a lower interest rate. However, because the loan is secured, it may be easier to qualify for than a personal loan.
• 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. They may also consider your debt-to-income ratio or how much of your gross income goes toward debt payments.

The approval process

The approval process for home equity loans can take a few weeks. As with a mortgage, it involves underwriting and an appraisal of your home. Borrowers must wait until these details are final to receive funds.

Repayment

A home equity loan is an installment loan that usually carries a fixed interest rate. You repay what you owe in monthly installments over a set period.

Benefits and drawbacks of home equity loans

Here are some things to think about if you’re considering a home equity loan.

Benefits

• Interest rates: A secured loan can mean lower interest rates. However, a home equity loan is considered a second mortgage, so the rate may be higher than your mortgage’s.
• Tax-deductible interest for certain expenses: Interest paid on a home equity loan may be tax-deductible if you’re using the money for home improvements.

Drawbacks

• Approval time: With an appraisal and underwriting, getting approved for a home equity loan can be longer than the approval process for an unsecured loan.
• Requires collateral: If you can’t make payments, you could lose your home.

How do personal loans work?

Personal loans offer borrowers a lump sum they can use for a variety of expenses. To qualify for a personal loan, borrowers must meet the lender’s credit score and income requirements. Personal loans usually don’t require collateral, so you don’t have to worry about losing an asset if you miss a payment.

Applying for a personal loan

You can usually complete a personal loan application online, by phone or in person. You’ll need documents like a government-issued ID, proof of income and proof of address. Because personal loans don’t usually require collateral, the application can be straightforward.

Eligibility requirements

Lenders may decide your personal loan eligibility based on these factors:

• Credit score: Personal loans don't usually require collateral – lenders mostly rely on the applicant's credit score to assess eligibility.
• Income: Lenders may have minimum income requirements. They may also consider your debt-to-income ratio, or the percentage of your gross monthly income that goes toward debt payments.

The approval process

Personal loans often have a quick approval process. If approved, you may receive funds within just a day or two.

Repayment

You repay personal loans in fixed monthly installments over the loan term. Usually, repayment begins once the money is disbursed. Personal loans often carry a fixed interest rate, so your monthly payment will be the same for the life of the loan.

Benefits and drawbacks of personal loans

As with any loan, personal loans may have potential upsides and downsides.

Benefits

• Receive funds quickly: Personal loans have a faster approval process than home equity loans. They require little paperwork, and you can usually apply online. Some lenders process personal loans within a day or two and deposit funds shortly after.
• No collateral: Personal loans don’t require collateral, like a house or car. However, you still risk damage to your credit score if you don’t make timely monthly payments.

Drawbacks

• Lower loan amounts with higher rates: Personal loans are ideal for borrowers whose credit score meets the lender’s eligibility requirements but may prove expensive for other borrowers. Maximum loan amounts may be lower than what you can borrow with a home equity loan.
• No tax benefit: Unlike with a home equity loan, if you use a personal loan for home renovations, interest paid is not tax-deductible.

How to choose between a home equity loan and a personal loan

Here are some things to consider if you’re choosing between a home equity loan and a personal loan:

• Credit Score: If your credit score meets the lender’s eligibility requirements, you may want to avoid the risk of a collateral loan and stick with a personal loan.
• Type of expense: Urgent expenses such as damaged plumbing or car repairs require immediate action. In these cases, a personal loan may be the faster, more efficient option. On the other hand, a home equity loan may make more sense for a long-term project such as a kitchen or bathroom renovation.
• Cost: Consider your expenses and what size loans are available to you. Lenders often have maximum loan amounts for personal loans. With a home equity loan, you can only borrow a percentage of the equity you’ve built.

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.

This article is for general educational purposes. It is not intended to provide financial or tax advice. It also is not intended to describe any Citi product or service. You should refer to the terms and conditions financial institutions provide for various products. Please consult your tax advisor with any tax questions. Citi is not a tax advisor.