What Is the Difference Between a Personal Loan and a Home Equity Loan?

Are you considering taking out a home equity loan? Or a personal loan? Learn more about these and how they’re different.

Secured vs. Unsecured Loans

Secured loans are tied to an asset. Loans like these include auto loans and mortgage loans. A home equity loan is like this. Instead of a standard mortgage, a home equity loan is secured by the value (equity), if any after calculating the value of the home, minus any existing loans.

If you currently have a mortgage payment and you’re considering a home equity loan, keep in mind you’ll essentially be repaying two loans for the same asset.

Unsecured loans like credit cards and personal lines of credit are not backed by collateral. These loans are negotiated based on a range of factors including your credit, level of income and debt-to-income ratio.

When Are Loans a Good Idea?

Loans are only viable solutions if you have the means to repay them quickly. The reason that creditors and banks grant loans is so that they can make money off you. Your interest payments are the “opportunity cost” of taking out a loan. You’re paying for the privilege of using someone else’s money. So, you’ll pay back the entire principal plus hundreds or thousands of dollars in interest fees.

We’re not saying you should never get a loan for any reason. This is more just to show the cost of getting a loan vs. whether you should or shouldn’t get a loan.

The Dangers of Secured Loans

If you’re behind on your payments when it comes to your secured debt, you could be in a situation where you could lose property. Never take out a higher loan than you can afford when it comes to a home or auto loan. The loan payment is only part of the cost of the asset — consider the cost of insurance and upkeep when budgeting how much you can afford.

When to Call CreditGUARD

If you’re behind on your credit card or loan payments, CreditGUARD’s certified credit counselors can advise you on how to handle your current debt situation. While we can’t consolidate your auto loan or mortgage debt, we can help with your unsecured credit debt. It’s possible to lower your monthly payments on some of these unsecured debts so that your secured debt payments can become more affordable.

Call us today at 800-500-6489 to learn more about how we can help you with unsecured debt problems and to find out about our financial education programs and debt management programs.