There are an unlimited number of reasons consumers seek out borrowing large amounts of cash for needs that a credit card limit simply won’t cover. However, there are just two options that continue to resurface for those financial demands: unsecured personal loans and home equity loans.
These loans can both fund the same expenses, but they operate quite differently. By recognizing the drawbacks and benefits of each approach, you can determine which loan will suit your situation best.
The Lowdown on Home Equity Loans
A home equity loan is like a second mortgage, which borrows on the equity accumulated by your home. That equity is also used as collateral by the lender.
High borrowing amounts
Because these loans are fueled by equity, they’re also characterized by larger principal amounts than you see on other personal loans. The Consumer Bankers Association (CBA) revealed that the average home equity loan is for $57,800, but you may be able to borrow as much as $100,000.
Two choices for rates
Lenders can provide a fixed rate loan in the form of a lump sum paid off at equal monthly intervals. However, you can also approach a home equity loan like revolving credit, with a variable rate which fluctuates based on the current market as well as how much of your line of credit is taken out at a time.
The ability to choose from two options provides an increased measure of flexibility for those who’d like to capitalize on their equity.
Long repayment period
While you must be consistent with your monthly payments of the loan, you do have the luxury of a deadline that’s years down the road. The average home equity loan can range anywhere between 5 and 30 years, depending on the terms and amount borrowed.
Tax Friendly
As a standout feature of the home equity loan, all of the interest you pay is subject to annual deduction, which softens the blow of the extra cost. However, if your loan isn’t for means of building or improving your current home, it’s considered debt. This debt limits your tax deductions on interest for loans up to $100,000 or $50,000 for a married couple filing separately.
The Unsecured Personal Loan Picture
Unlike a home equity loan, an unsecured personal loan doesn’t use any collateral in the event of defaulted payments. Instead, default will cause your credit score to suffer or a lender may sue you in civil court.
Lower borrowing amounts
Unsecured personal loans offer generous borrowing amounts that can be used for a range of needs. However, this cash is less robust than home equity, at amounts of $500 to $5,000.
One fixed rate
An unsecured personal loan will not boast the lower variable rate that gives an equity loan its initial appeal. However, an unsecured loan’s fixed rate means that there are no surprises and fewer risks when it comes to interest payments down the line.
Shorter repayment period
Smaller loan amounts often translate to a lender giving you a shorter window of time to pay it off—anywhere between one and three years. A faster deadline may feel like more pressure, but it also means that you can have that IOU off your plate faster.
Universal and accessible
While a home equity loan is more restricted to housing improvement expenses in order to maximize the tax benefits, a personal loan can be used however you see financially fit. Obtaining an unsecured personal loan won’t require you to undergo the strict lending requirement put forth post-recession by the mortgage industry.
More importantly, if your home value is underwater, a personal loan will provide you flexibility where you don’t have equity. With the Mortgage Bankers Association of reporting 250,000 families encountering foreclosure every three months, the ability to take out a personal loan becomes even more important.
A Clear Winner?
Only you can determine which loan is best for your situation. If you have the recurring expenses of a lengthy ongoing renovation project with improvements that will compensate for the cost of borrowing, a home equity loan might be right for you.
However, if you rent, or are looking for a smaller amount to finance a hefty expense like a wedding or debt consolidation, a personal loan may be your best bet.
Don’t forget to into account the APR term length and additional fees you might incur with both options. It’s important to determine not only what you’ll qualify for, but also what will allow you to come out ahead financially.
If an unsecured personal loan sounds like what you need, learn more from Click N’ Loans about how you can get connected to the cash you need.
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