Should you get a personal loan or home equity loan?

[Jun 2, 2011.]

 

It's important to choose the right loan product when borrowing money. That's why it pays to shop around to compare loans and lenders. If you are a homeowner with good credit, there are two types of loans you may be considering: personal loans and home equity loans. Here are some things to keep in mind when choosing between the two.

Unsecured personal loans

Personal loans are sometimes referred to as signature loans, because no collateral is required. But getting an unsecured personal loan usually involves a higher interest rate than for a secured loan. Interest rates can be fixed or variable, so make sure you understand which type you are being offered. Generally, you'll need a good credit score to qualify for a personal loan because lenders are taking more of a risk not having collateral to back what you borrow.

Home equity loans

You'll need some equity in your property to qualify for a home equity loan. That means that if you are underwater on a mortgage loan there is nothing to tap. But if you can qualify for a loan, your home serves as collateral in the event that you default. Home equity loans can have fixed or variable rates, and current rates are very affordable. While you'll need a good credit score to qualify for the best rates, you still might get approved if you have an average score but have a lot of home equity.

Benefits and drawbacks

As with any type of loan product there are drawbacks to personal loans and home equity loans. Personal loans tend to have interest rates that are higher than mortgage loan products, so you'll probably get a better rate with a home equity loan. You also may be limited in the amount you can borrow with a personal loan. But with a home equity loan, your ability to borrow is based upon how much equity is there when your home is appraised. Having a lot of equity could translate into a sizable loan.

Be careful when borrowing against your home equity, especially if there is a variable rate involved. Anything could happen to cause you to fall behind with mortgage loan payments, which could ultimately result in you losing your home.

 

About Author:

Francine L. Huff is a freelance journalist and the author of The 25-Day Money Makeover for Women. She has appeared on a variety of TV and radio shows.