Personal loans and home equity loans
bear many similarities. They are both issued in the form of lump-sum payments,
they are both repaid over a series of monthly instalments and they can both be
used for almost any legal purpose.
But there is one major difference
between the two in relation to how they are issued. Personal loans are almost
always unsecured and are therefore issued on the basis of the borrower’s
financial status. By contrast, a home equity loan is secured against the
borrower’s home, rendering their financial status far less important.
When a borrower offers their home as
security for a loan, they can access much larger sums of money than would be
available with a personal loan. These home equity loans can also attach lower
interest rates and borrowing costs, as they are generally seen as safer by the
Even so, there are pros and cons to
both options to be aware of. If you are looking to borrow money for any purpose
and both types of loans are available to you, it is vital to make the right
choice to suit your requirements and your budget.
Personal Loans: Application and
No security (collateral) must be
provided when applying for an unsecured personal loan. Instead, applications
are considered by way of their overall merit, based primarily on the following:
The credit score of the borrower at the time of applying
The applicant’s employment status and income level
All of the applicant’s current outgoings and existing debts
Whether they have previously declared bankruptcy
Provision of recent bank statements (usually three months)
The size of the loan being applied for
will also factor into the decision reached by the lender. For larger loans,
applicants are expected to have better credit scores, higher income levels, and
minimal existing debts.
Approval for an unsecured personal
loan usually takes 1 to 7 business days, while decisions in principle can be
returned almost immediately. Unsecured personal loans are rarely issued in sums
higher than £10,000-£15,000, with loan values starting from as little as £500.
This makes personal loans ideal for covering the costs of smaller purchases,
projects, and investments if you only need a small sum of money to tide you
Interest rates and borrowing costs
vary significantly from one product and lender to the next – anything from 2%
to 10% APR. Independent broker support is therefore essential in order to
ensure you get a competitive deal from a top-rated lender.
Home Equity Loan Application and
A home equity loan is slightly more
complex to arrange, as your lender will first need to confirm the current
market value of your home. After which, the amount of equity you have in your
property will determine how much you can borrow.
For example, if your home is valued at
£300,000 and you have repaid £250,000 of your mortgage, this is your equity. A
lender may be willing to offer a home equity loan to a maximum LTV (loan to
value) of 80%, meaning you could borrow 80% of this £250,000 – i.e. £200,000.
Of course, this does not mean that you
must take out the highest-value loan possible against your home. A home
equity loan can typically be taken out starting from £10,000 and up and is
therefore ideal for funding more extensive projects and investments.
Your income level and credit score
will be taken into account, but will not necessarily count you out of the
running for a home equity loan.
As with unsecured personal loans, home
equity loan costs vary significantly from one product to the next. The interest
rate you are quoted will be influenced by how much you borrow, the size of the
LTV, the length of the repayment period, and more.
But as security is provided as an
insurance policy for the loan, lenders typically offer home equity loans with
lower interest rates and borrowing costs. Though again, it is essential to seek
independent broker support, in order to ensure you get a good deal.
What Is the Most You Can Borrow with a
Home Equity Loan?
The fact that a home equity loan can
be repaid over anything from 5 to 30 years makes it a hugely flexible and
affordable facility. This also opens the door to much larger loans, enabling
homeowners to tap into the equity they have tied up in their properties.
In terms of the maximum loan size
available, all lenders have their own unique policies. As a general rule of
thumb, home equity loans are issued with a maximum LTV of 75% to 85%. Some
specialist lenders will offer loans with a higher LTV, just as others will
limit their maximum home equity loans to 60% LTV or less.
This, therefore, means that the value
of your home will be the main determining factor when it comes to how much you
can borrow. But it is also important to acknowledge how a higher LTV typically
translates to a higher APR.
This is not always the case, but lower
LTV home equity loans often attach lower overall borrowing costs.
The maximum loan size you will be offered will be tied to
the total value of your home, or how much of your mortgage you have paid off
It is possible to borrow up to 85% of the value of your
home, but some lenders are more restrictive with maximum LTVs.
Borrowing as much as you possibly can is not usually
advisable, as higher LTVs typically attach higher borrowing costs.
Your income level and credit score will be taken into
account, but will not necessarily count you out of the running for a home
A home equity loan can be repaid over anything from 5 to 30
years, but prompt repayment usually results in lower borrowing costs.
Before applying, consult with an
independent broker to discuss your suitability for a home equity loan, in line
with your intended applications for the funds.
Applying for a home equity loan also
means being mindful of some of the potential downsides of this kind of secured
Are you 100% confident in your long-term ability to
comfortably afford the monthly repayments?
Have you considered the possible consequences in the event
you are unable to repay your loan?
What is your lender’s policy regarding late payments,
missed payments, and other potential issues that may arise?
Is the APR on the loan competitive after taking into
account all other associated borrowing costs?
Will you have the option of repaying your loan early, and
what kinds of fees/penalties may apply if so.
Have you compared the market in its entirety to ensure you
are getting an unbeatable deal?
These and other considerations will be
examined in-depth during your initial consultation, making experienced broker
Does a Home Equity Loan Always Attach
Lower Interest Rates Than a Personal Loan?
The short answer is no, as there are
instances where a personal loan can be the more affordable option.
Over recent years when interest rates
hit record lows, unsecured personal loans were being issued with impossibly low-interest rates of less than 1%. You could therefore borrow £5,000 over the
course of a few years and pay back almost the exact same amount, shy of a token
APR as low as 0.5%.
In such instances, this would be the
option to go for.
But in a more general sense where
interest rates are not quite so low, secured borrowing is almost always
cheaper. The same can also be said when looking to borrow significant sums of
money, which are often only available in the form of secured loans.
As with all financial products, it
depends entirely on your requirements, your budget, and how you intend to spend
the funds. Some unsecured loans are cheaper than secured loans and the same is
also true in reverse.
This is something that emphasises the
importance of comparing the market in full while considering all available
products from the UK’s highest-rated lenders.
The Bottom Line…
There are instances where unsecured
personal loans and secured home equity loans could both be viable options. When
you are looking to fund a purchase, a project, or an investment of some kind.
Figuring out which is the most cost-effective option means carefully
considering the full range of products available and comparing deals from an
extensive network of lenders.
While it can be tempting to dive into
the first affordable deal that comes along, independent broker support could
save you time, effort, and money on any type of secured or unsecured loan.