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Personal Loans vs. Home Equity Loans

Posted December 1st, 2009
by PersonalLoans.org Staff

Hands holding red and green applesWhen you’re in the need for cash, you’ve got options. Especially if your credit is in good shape, you probably have several choices to pick from. That’s not a bad thing. Having different loan options means you can do some comparison shopping. Do the legwork, and you’ll be sure to get the best interest rate and terms for your situation.

Personal Loans

One of the ways you can get money is with a personal loan. A personal loan is really a broad category that covers just about any type of loan that isn’t a home loan or a car loan. A personal loan can be used to pay off bills, to build an addition on your house, to pay for a wedding, or to send your child to college.

Personal loans fall into one of two types. There are secured personal loans and unsecured personal loans. Secured personal loans are loans that have some form or another of a “security” – collateral that the borrower provides as backing for the loan.

When you say “personal loan,” however, most people think of an unsecured personal loan. Sometimes called a “signature loan,” an unsecured personal loan doesn’t require the use of any collateral. You’re borrowing money on your own name, and the lender creates terms that coincide with the risk involved.

Terms and interest rates on a secured personal loan are usually much better than terms and rates on an unsecured personal loan. Because of the security involved, the lender doesn’t have as much risk with a secured personal loan.

Home Equity Loans

One type of secured personal loan is the home equity loan. This may take the form of a lump sum loan payout, or it may take the form of a line of credit, often known as a “Home Equity Line of Credit.” You can then use the money from the lump sum or the line of credit for whatever purpose you wish.

Home equity loans are typically only for a fraction of the equity in your home. If you have stellar credit, however, some lenders are actually willing to loan up to and sometimes beyond your current equity in your home.

Some home equity loans, like some other personal loans, may come with some agreement between you and the lender as to how the money can be spent. For example, a home improvement loan requires you to spend the funds making improvements to your home rather than consolidating credit card bills.

Which is Better?

The type of loan you choose depends on a number of factors, not the least of which is the options you qualify for. You may want to consider an unsecured personal loan if you don’t want to put your house on the line. On the other hand, you might choose a home equity loan just based on the sheer fact that you’re going to have much better loan terms and a much lower interest rate on top of it all.

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