When you need to pay for a big expense, like a renovation, medical bills, or consolidating debt, two common options are a personal loan and a home equity loan. Both give you a lump sum that you repay in fixed monthly installments, but they differ in cost, speed, and risk. Here’s how they compare and how to choose the right one for you.
Personal Loan vs. Home Equity Loan at a Glance
Personal loan
- Collateral: Usually none (unsecured)
- Typical rates: About 6% to 36%, with an average around 12.5%
- Loan amounts: Often $1,000 to $100,000
- Repayment terms: Usually 2 to 7 years
- Funding speed: Often within a few days
- Closing costs: Usually none, though some lenders charge an origination fee
- Risk: Missed payments hurt your credit, but your home isn’t directly at risk
Home equity loan
- Collateral: Your home
- Typical rates: Around 7.5% on average
- Loan amounts: Based on your equity, often up to 80% to 85% of your home’s value minus your mortgage
- Repayment terms: Usually 5 to 30 years
- Funding speed: Often several weeks, since an appraisal is usually required
- Closing costs: Often 2% to 5% of the loan amount
- Risk: Missed payments could lead to foreclosure
Rate data: personal loan average from Bankrate as of October 21, 2026; home equity loan average from Curinos as of October 19, 2026.
How Personal Loans Work
A personal loan is usually unsecured, meaning you don’t put up any collateral. Lenders base your rate mainly on your credit score, income, and existing debt. Borrowers with excellent credit may qualify for rates near 6%, while those with poor credit can see rates up to about 36%.
Because there’s no appraisal, personal loans are fast. Many lenders let you check your rate with a soft credit pull and fund the loan within a few days. The trade-off is a higher rate and a shorter repayment term, which means higher monthly payments.
How Home Equity Loans Work
A home equity loan lets you borrow against the equity in your home and repay it with fixed payments over a set term. Because your home secures the loan, lenders usually offer lower rates than on personal loans.
How much you can borrow depends on your home’s value, what you owe, and the lender’s combined loan-to-value (CLTV) limit. Many lenders look for a credit score of at least 620, though some require higher. Expect an appraisal, more paperwork, and closing costs.
Cost Comparison: Borrowing $40,000
Personal loan, 5-year term (12.55% rate)
- Monthly payment: about $901
- Total interest: about $14,100
Home equity loan, 5-year term (7.5% rate)
- Monthly payment: about $802
- Total interest: about $8,100
Home equity loan, 10-year term (7.5% rate)
- Monthly payment: about $475
- Total interest: about $17,000
On the same 5-year term, the home equity loan saves about $6,000 in interest, though closing costs of 2% to 5% ($800 to $2,000 on this loan) cut into those savings. Stretching the home equity loan to 10 years lowers the payment but costs more total interest than the 5-year personal loan. The lower rate only saves you money if you keep the term reasonably short.
When a Personal Loan May Be the Better Choice
- You need the money quickly
- You’re borrowing a smaller amount, where home equity closing costs would eat up the savings
- You don’t have much equity, or you don’t want to put your home at risk
- You have strong credit and can qualify for a competitive rate
- You can afford a higher payment to pay the loan off quickly
When a Home Equity Loan May Be the Better Choice
- You’re borrowing a larger amount, where a lower rate makes a bigger difference
- You have significant equity in your home
- You want a lower monthly payment
- You’re using the money for home improvements, since interest may be tax deductible if you itemize
- You’re comfortable using your home as collateral
What About Taxes?
Interest on a personal loan used for personal expenses isn’t tax deductible. Interest on a home equity loan is generally deductible only if you use the money to buy, build, or substantially improve the home that secures the loan, and you itemize your deductions. Using a home equity loan to pay off credit cards or cover other expenses doesn’t qualify. Talk to a tax professional about your situation.
Other Options to Consider
HELOC
A home equity line of credit lets you borrow as needed, usually at a variable rate. It’s useful when you don’t know exactly how much you’ll need, like for a renovation done in phases.
Cash-Out Refinance
A cash-out refinance replaces your mortgage with a larger one and pays you the difference. It generally makes sense only when today’s rates are close to or lower than your current rate.
Home Equity Agreement
A home equity agreement from Nada gives you a lump sum in exchange for a share of your home’s future value, with no monthly payments or interest. It can be an option if you have equity but don’t want to add another monthly payment. See if you qualify.
How to Decide
Ask yourself:
- How much do I need? For smaller amounts, a personal loan’s speed and lack of closing costs often win. For larger amounts, a home equity loan’s lower rate can save more.
- How fast do I need it? If it’s urgent, a personal loan is usually quicker.
- What monthly payment can I handle? Compare both the payment and total interest, not just the rate.
- Am I comfortable using my home as collateral? If not, a personal loan or a payment-free option may be a better fit.
If you’re consolidating high-interest debt, see our guide to using home equity to pay off debt.
