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Should I Use My Home Equity or Personal Loan to Pay Off Debt?

homeowner checking how to payoff using home equity or personal loan

If you’re a homeowner and want to pay off or consolidate debt, you should strongly consider a second mortgage like a home equity loan. Compared to personal loans, a home equity loan often carries a much lower interest rate, which will allow you to save money in the long run. Home equity loans carry lower rates because they represent a lower risk to lenders as the financing is secured by your residence. 

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Personal loans, on the other hand, often have higher interest rates because of the fact that they are not secured by any kind of collateral. As a result, lenders have a higher risk when lending money in the event of a default. To account for the increased risk of lending, most banks will charge higher rates or fees.

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What debt can I pay off with a home equity or personal loan?

With rare exceptions, a home equity loan and a personal loan can both be used to pay off and consolidate the same types of debt. As a result, unless you’ve been specifically prohibited from using loan proceeds for debt payoff, either type of loan can be used to pay off loan balances from credit card debt, student loans, auto loans, other home equity loans, charge cards, and more. 

Not all debt is created equal, as each will carry varying interest rates, terms, and costs. Using a home equity loan or personal loan can help you with debt consolidation and move bad debt to good debt. Below is a summary of typical loan costs you might see depending on what debt you’re currently carrying.

Type of DebtTypical Interest RateTypical Repayment Term
Credit card20% to 30%Revolving
Charge cardN/ARevolving
Auto loan5% to 15%3 to 7 years
Student loan4% to 12%10 to 20 years
Mortgage or other home equity loan7% to 12%10 to 30 years
Line of credit10% to 15%5 to 10 years
Medical debtVariesVaries

Benefits of paying debt with a home equity loan or personal loan

There are many reasons why a home equity loan or personal loan can be beneficial as part of a debt consolidation. Below are four scenarios commonly considered by borrowers:

  • Save money on interest charges: By doing a debt consolidation and paying off high-interest-rate debt, like credit card debt, with a lower-rate loan, you can save money in the long run by reducing the amount of interest charges you pay. 
  • Reduce the amount of your debt payments: While an interest-rate reduction can help lower your monthly payment amounts, this can also be achieved by getting a new loan that has a longer repayment period. 
  • Reduce the volatility of your loan payment amounts: If your monthly payment fluctuates because it is an adjustable-rate loan, paying it off with a fixed-rate loan can give you more peace of mind, knowing that your future loan payments will not change. 
  • Simplify your finances: By consolidating payments across multiple loans into just one individual payment, you can streamline and simplify your personal finances.

How to pay off or consolidate debt with a home equity loan & personal loan

Home equity loans and personal loans have their differences, but where they’re the same is how they can be used to pay off debt. Once you’ve been approved for either of these, you’ll usually be given the option to have the loan proceeds deposited into your bank account or to be sent directly to your creditors. 

If you decide to have the loan proceeds sent directly to your creditors, it’s important that you get the correct payoff instructions for each loan you wish to be paid. If the loan proceeds are sent to the wrong institution or credited to the wrong account, it can be a lengthy process to have the error corrected.  

Differences between using a home equity loan or personal loan for debt payoff or debt consolidation

While a home equity loan and a personal loan can both typically be used to pay the same types of debt, there are some differences. One of the biggest differences is the loan amount you can get. Most personal loans have a maximum of $20,000. Home equity loans can provide $250,000 or more in funding, with many lenders willing to issue approvals up to a 95% loan-to-value ratio. 

Rates, qualification requirements, and the length of time needed to get funds are among the most notable. However, differences also exist in other areas such as what could happen to your property in the event you default on the loan.

Home equity loanPersonal loan
Maximum loan amountAs high as $250,000 + (95% loan-to-value ratio)Typically less than $20,000
Interest Rates8% to 10%12% to 30%
Closing Costs and Loan Fees1% to 3% of the loan amountVaries, but typically $0 to $99
Collateral Required?YesNo
Funding Speed2 to weeks1 to 7 days
Ease of Loan Approval ProcessModerate to difficultEasy to moderate

Interest rates and closing costs

Interest rates on a home equity loan tend to be much lower than that of a personal loan. Typical home equity loan rates are around 9% (Q1, 2024). Personal loans, on the other hand, tend to have rates between 12% and 30% (Q1, 2024).

To illustrate how much money you could end up saving by choosing the lower-rate home equity loan, consider the example below, assuming an initial loan amount of $100,000 and a competitive personal loan with a rate of 12%.

Home equity loanPersonal loan
Initial Loan Amount$100,000$100,000
Interest Rate9%12%
Repayment Period10 years10 years
Monthly payments$1,266.76$1,434.71
Total Interest Paid$52,010.93$72,165.14

As you can see, even with a competitive rate on a personal loan, you would save a significantly larger amount by going with a home equity loan. This 3% difference in interest rate yields a savings of nearly $168 in monthly payments and a total of nearly $20,200 savings in interest charges over the life of the loan. 

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Collateral required

A home equity loan is typically a second mortgage that uses your property as collateral for the loan. Most personal loans, by comparison, do not require any collateral in exchange for getting funding. The significance of this to you as a borrower is that in the event you default on loan payments, your lender can seize that collateral. 

In other words, while a home equity loan can offer lower rates, it also carries the risk that you could lose the property to your lender if you stop making timely payments.  

Time needed to get approved and funded

Depending on how quickly you need funds or want to pay off debt, you may need to consider the difference in timelines when it comes to getting a home equity loan vs. a personal loan. Home equity loans can take up to 6 weeks to fund, while personal loans can often be completed in under one week. 

A major reason why home equity loans take longer is because lenders need to evaluate the value and condition of the property that’s being secured. This requires an appraisal that often calls for a certified appraiser to physically inspect the property if a computerized estimate is not available or is otherwise deemed unreliable or unacceptable by the lender. Scheduling the appraisal inspection and waiting for the completed appraisal report is a process that can take between 5 and 10 business days. 

Ease of loan approval process

Another major difference between a home equity loan and a personal loan is that home equity loans typically have a more difficult approval process. More documentation is required, resulting in a lender needing more time to review the items during its underwriting process. Since it’s a secured loan, however, some loan approval guidelines tend to be easier to meet. For example, home equity loans tend to have a lower minimum credit score requirement because they are secured loans, making them potentially easier to get approved if you have fair or poor credit.

Personal loans, on the other hand, don’t require as much documentation to get approved. The minimum credit score needed to qualify, however, tends to be higher since these are unsecured loans.

For more details, read our guide on what happens when your loan goes to underwriting

Pros and cons 

To summarize the main benefits and drawbacks of using a home equity loan or a personal loan to pay off debt, below are some pros and cons we believe you should strongly consider.

Home equity loans

More competitive interest ratesA more difficult approval process
Longer repayment terms and lower monthly paymentsTakes longer to get approved and funded
Larger loan amounts are availableYou could use your home if you default

Personal loans

Faster funding speedsHigher interest rates
Easier loan approval processShorter repayment terms
Rarely requires collateral to be pledgedMaximum loan amount may be smaller compared to home equity loans

How to choose between a home equity loan or a personal loan

Home equity loans and personal loans have many different characteristics and nuances. To help you make the best decision to pay off or consolidate debt, here are some scenarios in which you may want to choose a home equity loan or a personal loan. 

When to choose a home equity loan

A home equity loan may be the better choice for you if the following scenarios apply to you:

  • You have a lot of home equity: To get a home equity loan, you’ll typically need to have at least 10% to 20% equity in your property. To figure out how much equity you have, take the property’s appraised value and subtract the dollar amount of total mortgage liens. Take the remaining figure and then divide it by the property’s appraised value. Alternatively, you can check out this article on how to calculate home equity
  • You have good credit, financial reserves, and stable income: To get approved for a home equity loan, you’ll need to have good credit, sufficient reserves, and stable income. Although it’s possible to get approved with less than a good credit score, you’ll be less likely to get approved for the best available rates. Additionally, having sufficient reserves and stable income will reduce the likelihood that you’ll lose your home in foreclosure. Check out our guide on the four pillars of home wellness that can affect your approval odds. 
  • You don’t need funds quickly: Home equity loans generally take between 2 and 6 weeks to get approved and funded. This is true of other second mortgage loans, including home equity lines of credit. As a result, it’s best reserved for borrowers who are not in immediate need of funds. 
  • You want to prioritize saving money: Home equity loans can offer lower interest rates and longer repayment terms, both of which can allow you to have lower monthly payments as well as save money on interest charges over the lifetime of the loan. 
  • You want to pay off a large amount of debt: Depending on the amount of equity you have in your property, it’s much more likely you can get a larger loan amount on a home equity loan compared to a personal loan. This is a great strategy when leveraging home equity to build wealth.

When to choose a personal loan

If the following scenarios apply to you, a personal loan might be the better choice over a home equity loan:

  • You need funds quickly: Many personal loans can be approved and funded in under one week. Home equity loans, by comparison, often take between 2 and 6 weeks to get funded. 
  • You have a small amount of debts to be paid: Home equity loans often have a minimum loan amount that can be issued. These loans may also carry certain closing costs that may make it prohibitively expensive if you don’t need a large amount of funding. 
  • You don’t have financial reserves or stable income: A personal loan is usually an unsecured loan and will not require you to pledge collateral. As a result, you’re far less likely to lose your home even if you are unable to make payments. This can make a personal loan less risky for you if you don’t have financial reserves or don’t have a source of stable income.
  • You don’t have enough home equity: If you don’t have sufficient equity to qualify for a home equity loan, a personal loan can still help you achieve your goal of paying off debt. 

Where and how to get a home equity loan or personal loan

Home equity loans and personal loans are offered by many credit unions and banks. Consider what is most important to you when it comes to the features and qualities you want in not only the loan itself but also the lender you work with.

We’re biased 😉 but the best place to secure a home equity loan is House Numbers. Not only do we shop the market for you, but we also help create a debt payback calculator for you. We’ll tell you which debts should be paid off first and how much cash you can access (and at what interest rate!).

Below are some examples to consider when choosing a bank:

  • Rates and terms offered
  • Closing costs and fees
  • Qualification requirements
  • Hours of operation
  • Branch locations
  • Customer service reviews and ratings 

Once you’ve decided which lender you want to work with, you’ll need to submit a loan application and provide any documents it requires as part of the approval process. The more responsive you are, the greater the likelihood you’ll be funded more quickly. 

Should my debt be paid using a home equity loan or a personal loan?

In most cases, choosing a second mortgage, like a home equity loan, is the better choice because the interest rates and monthly payments tend to be much lower. However, a personal loan could be worth considering, depending on your circumstances. Regardless of which one you decide to use, make sure that the benefits you’ll gain will outweigh any costs or potential risks of borrowing the money.

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Disclaimer: The above is provided for informational purposes only and should not be considered tax, savings, financial, or legal advice. All information shown here is for illustrative purpose only and the author is not making a recommendation of any particular product over another. All views and opinions expressed in this post belong to the author.

Andrew Wan

Written By Andrew Wan

With a decade of experience as a mortgage underwriter and a licensed California real estate broker since 2018, Andrew Wan use his expertise and experience to share insights on the housing industry. He covers a wide variety of topics, from buying a home to what the home loan process entails, and enjoy sharing tips to help better prepare you for how to make it all a seamless experience.