If you need to borrow money, a personal loan might be a better choice for one key reason
- With a personal loan and a home equity loan, you can use your loan proceeds for any purpose.
- Although you can get a lower interest rate on a home equity loan, you risk losing your property if you can’t make your payments.
There may come a time when you need to borrow money, whether it’s to fix your car, pay a big medical bill, or cover some other surprise expense. The good news is that there are a number of loan products that allow you to borrow money for any reason. These include personal loans and home equity loans.
Often, you’ll get a lower interest rate on the money you borrow when you take out a home equity loan than a personal loan. If you are a homeowner and have sufficient equity, it may also be easier to get a home equity loan.
Despite this, you may feel more comfortable taking out a personal loan. Here’s why.
When you don’t want to put your house in danger
Personal loans are unsecured loans. This means they are not backed by any specific type of warranty.
Mortgages, for example, are secured loans, backed by the homes they need to finance. If you don’t meet your mortgage payments, you risk losing your home. But if you fall behind on your personal loan repayments, you are not at risk of losing a specific asset.
Home equity loans work just like mortgages in this regard. When you take out a home equity loan, it is secured by your home itself. If you fall behind on your loan repayments, you risk losing your home.
It is for this reason that you may want to consider borrowing through a personal loan the next time you need money. This way you don’t put yourself in a position where you could risk losing your home.
Be careful when borrowing with a personal loan
Although personal loans are unsecured and you may think the damage will be less if you fall behind, be aware that failure to keep up with a personal loan could cause significant damage to your credit score. credit. Once that happens, it could become quite difficult to borrow money if you need it.
Also, with a personal loan, the higher your credit score at the time of your application, the lower the interest rate you are likely to get on your loan. If your credit score isn’t in top shape, you could end up with a higher interest rate that makes your loan repayments more difficult to manage.
Home equity lenders also review applicants’ credit scores. But because home equity loans are secured, you may find it easier to qualify for a loan with a credit score that isn’t the best. This means that you might be able to get a more favorable interest rate with a home equity loan.
If you’re behind on a home loan, your lender may eventually force the sale of your home to get paid off. These lenders are generally more concerned with the amount of equity you have and less concerned with the appearance of your credit score.
Should I opt for a personal loan or a mortgage?
No matter what loan product you use to borrow money, it’s important to keep track of your payments. If you’re not sure you can do this, you might be better off delaying your loan application or finding another way to meet your need for the money.
That said, the idea of a personal loan may suit you better than the idea of a home equity loan. If so, do some rate shopping before you sign a loan so you can keep your payments as manageable as possible.
The Ascent’s Best Personal Loans for 2022
The Ascent team has scoured the market to bring you a shortlist of the best personal loan providers. Whether you’re looking to pay off debt faster by lowering your interest rate or need extra money to make a big purchase, these top picks can help you reach your financial goals. Click here for the full rundown of The Ascent’s top picks.