Financing Your First Business

Three Reasons A Personal Loan Is Better Than A Home Line Of Credit

8 July 2019

Jimmie Holland

It's common for homeowners to tap into the equity in their houses when they need cash for repairs, upgrades, or other expenses. On paper, this may seem like it makes the most financial sense. In reality, though, here are three reasons why getting a personal loan—rather than a home equity loan or line of credit—is the likely the better option.

Faster and Easier Approval

Personal loans are typically easy to get. Generally, all you need to do is fill out a short application and submit it to the lender. The bank will then do a credit check and let you know fairly quickly (usually within a day or two and sometimes even instantly) whether you've been approved for the loan. Though you may be asked for documents verifying your income and/or employment, the process is basically that straightforward.

Applying for a home line of credit, on the other hand, can get very complex very quickly. Since your credit limit is based on the amount of equity you have in your home, it's not unusual for lenders to require a home appraisal as part of the application process. In addition to forcing you to wait longer for an approval, you'll have to pay out of pocket for the expense. Even if the bank pays for the appraisal, they may find a way to tack on the cost to your loan, so you'll still end up paying anyway.

If you need money fast, your best bet is to apply for a personal loan before trying to tap into the equity in your home.

You Pay Less Interest

The interest rate charged for a personal loan is typically higher than the rate charged for a home equity loan, so it may seem counterintuitive to say you'll pay less interest over time when you opt for a personal loan. However, in many situations this is true because home equity loans are paid back over a longer period of time than personal loans, which means you'll end up paying more interest in the long run.

For instance, a person with good credit can expect to be charged up to 15.5 percent for a personal loan. On a $30,000 loan that's repaid in 5 years, you'll pay about $12,348 in interest. The current home equity loan rate is 5.87 percent, but you'll end up paying $14,748 in interest fees over 15 years or $32,804 over 30 years for the same amount of money.

While it's true your monthly payments will be lower with a home equity loan, that's not necessarily a good thing for your long-term financial health when you may end up paying nearly double in interest over the life of the debt. When comparing loans, be sure to look at the big picture such as term lengths and total interest paid and select the one that best fits your goals.

There's Less Financial Risk

Home equity loans are a bigger risk to your finances than a personal loan because the bank could foreclose on your home if you fail to repay the debt. With a home equity loan, your home serves as collateral for the loan, which is why banks can offer such low interest rates. If you default on the loan, the bank will simply take your home and sell it to recoup the money you owe, leaving you homeless.

On the other hand, personal loans are unsecured debt, which means the bank is taking you at your word you'll pay the money back. If you fail to repay the debt as agreed, the most you'll probably lose is your good credit rating. While it's essential you do everything you can to pay your debts, you shouldn't have to worry about becoming homeless due to your failure to pay if you happen to run into a string of bad luck in your finances.

For more information about personal loans or to get money for the things you need, contact a local bank or credit union.

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