Personal Loan vs. Home Equity Loan vs. Credit Card
When Jason, a 30-year old corporate employee, was faced with a financial emergency and needed about $10,000, he knew that he would have to go for a loan. The choice of a loan, however, led to the main confusion. A relative suggested him to take a home equity loan while a friend said that personal loan would be better while Jason himself was thinking about taking a cash advance on his credit card. He chose a credit card and ended up paying huge interest. If you are facing a situation like Jason’s, here is a comparative analysis of personal loan against home equity loan and credit cards to help you make the right choice. But first, let us understand how the three of these work.
A home equity loan taps into your home equity which means the market value of your home minus the mortgage you owe on it. If the value of the home is $450,000 and you still owe $250,000 to the mortgage lender, your home equity would be $200,000. Now, banks are usually willing to give about 80% of home equity as a loan. So, in this case, the maximum home equity loan you can get would be $160,000 which is a significant amount.
On the other hand, a personal loan is a type of unsecured loan which is given to you entirely on the basis of your financial record. No collateral is required, and the application process is also simpler than a home equity loan. Credit card cash advance is the simplest of all as you do not have to undergo a new application process. You can take your card to the nearest ATM and withdraw the amount you need. If your card is already maxed out, this type of borrowing will not be possible.
So, how do you choose between these three options?
There is no set rule as to what you should choose. The choice depends on how much risk you are willing to take and how much interest you can afford.
Personal Loan vs. Home Equity Loan
Some critical points to compare these two:
- The major benefit of home equity loan over the personal loan is that the rate of interest would be considerably lower. The interest rate on home equity loans ranges between 4% and 8% whereas the personal loan interest rate is much higher as compared to this.
- The main drawback of a home equity loan is that your house is directly at risk; if you fail to repay the loan, you may lose your house. Is this loan worth losing your home? The choice is up to you.
- You may get a tax benefit on home equity loans but not on personal loans.
- If you are in a hurry to get the loan, home equity loan may not be the right choice as asset valuation, and verification might take some time. Best Personal loans come with an easier and quicker application process.
Personal Loan vs. Credit Cards
Here are a few parameters on which we can compare the two of these:
- Credit cards are the easiest solution to getting some quick cash. It is already in your wallet, and you just have to withdraw the amount. No application is required.
- The rate of interest on credit card cash advance can be high, and the terms are also not quite favorable which is why it calls for more financial trouble as compared to personal loans.
- Credit cards have the benefit of revolving credit, but in this case, it can do more harm than good. The amount is withdrawn, if revolved to the next billing cycle, will attract interest and the new bills that you ring up on the card adds to the problem. Personal loans have fixed term and it is easier to pay it off within the term.
The Bottom Line
A comparison of personal loan against home equity loan and credit card suggests that personal loan offers you the best of both worlds. With a good credit profile, you can get a loan at a reasonable rate of interest without putting your home directly at risk. However, each of the products has its own merits.