Personal Loans or Home Equity Loans, Which Is Better for Consolidating Debts

by Guest on Aug 1, 2021

If you are like most Americans, swiping credit cards to finance your lifestyle will be a matter of habit. It is little wonder that Experian confirms that the average credit card balance by an American is nothing less than USD$8000. When you calculate the repayment of credit card dues, along with other personal loans, student loans, medical debt, it is very easy to figure out why this kind of lifestyle is unsustainable. While there are quite a few ways of beating the debt trap and getting your finances back in order, debt consolidation is the first method financial experts will suggest. It is relatively simple to execute and with some determination, the results can be pretty effective.

Debt Consolidation Explained

When you have multiple credit card balances and a few personal loans to boot, the expense on the interest outgo is massive due to the very high rates of interest. As a result, if you are only paying the minimum amount due every month, it can take a very long time to repay the entire amount. If you continue to use your credit cards in the meantime, getting out of debt might not even be feasible and your finances will be crippled. Debt consolidation is a simple way of replacing expensive debt with a fresh loan of the same amount but with a lower rate of interest. All you need to do is to find out how much you owe to the credit card issuers and then take a loan from a bank or some other financier who will offer you a loan carrying a significantly lower rate of interest. You could take a loan from a bank or credit union; however, they follow very strict and bureaucratic lending policies that might make it difficult for you. If you have a very good credit score, you may be eligible for a zero-percent balance transfer offer from a credit card issuer but the promotion is usually for a very short time that may not be sufficient for you to repay the debt fully. The most common options for people seeking to consolidate their debts are a personal loan from a private lender or a home equity loan. However, before you choose one or the other, you should know what each of them entails and which one is the best for you.

What Is a Personal Loan?

Personal loans have become extremely popular in recent times for meeting a variety of financial needs. Loans for consolidating debts from banks or private lenders are also very common since the rates of interest applicable to them are significantly lower than the credit card APRs. These loans are typically unsecured, which means that they are not backed by any asset owned by the borrower unlike auto loans or home mortgages. The borrower receives the money upfront and repays it according to the schedule agreed upon with the lender. The amount of personal loans ranges from $1,000 to $ 100,000 and are available for periods ranging from 12 months to 60 months. The credit history and the ability of the borrower to repay are prime considerations for lenders for evaluating the loan proposal. Borrowers with good credit scores get approved faster and the rate of interest is also lower. Borrowers with poor credit scores and an unstable history of employment may find it difficult to get a personal loan and the rate of interest may be so high that it may not make sense to consolidate credit card dues.

What Is a Home Equity Loan?

The equity of a homeowner is represented by the difference between the market value of the property and the current balance of the mortgage, according to Forbes. Home equity loan proposals are in effect an offer of the equity as collateral for an additional loan or second mortgage. Similar to a personal loan, the amount is made available in a lump sum and the borrower has to pay it back within the contracted period in monthly installments. The significant difference between a home equity loan and a personal loan is that the rate of interest is far lower as the loan is secured by the property and the period of the loan may be as high as 25-30 years. While the credit history of the borrower is not as important, the property will need to be appraised. Since this involves fees and closing costs, it is a good idea to explore offers by lenders other than the original lender for the most competitive offer.

Personal Loans vs. Home Equity Loans – Advantages Compared 

For a debt consolidation exercise, personal loans work better if you have a strong credit history and need the funds quickly. Compared to some of the online lenders disbursing loans within a couple of days, home equity loans get processed slower due to the appraisal and other review processes conducted on the original home mortgage. It is more worthwhile to go in for a personal loan when the amount is small because you can avoid the entire appraisal and underwriting process involved in a home equity loan.

To apply for a home equity loan, you should have substantial equity in the property and also live in an area where the market values are stable or rising. The biggest hazard of a home equity loan is that defaulting on the repayments will put the property at risk of foreclosure while if you default on the personal loan, you will only end up damaging your credit score. You may be perhaps sued by the lender but you will not have compromised the security of your family. However, if you are confident of your capability to repay the loan, the advantage of the lower rate of interest can be quite significant.


The ultimate decision of the type of the loan will depend on the amount of the loan, the state of your creditworthiness, the amount of home equity you have, and other personal financial circumstances. If the amount is reasonably low, it may merit choosing a personal loan to consolidate credit card balances rather than exposing your most precious asset to risk.

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