# Home Equity vs Personal Loan Comparator

> Compare home equity loans/HELOCs versus personal loans to find the best borrowing option for your situation.

**Category:** Finance
**Keywords:** home equity, HELOC, personal loan, loan comparison, interest rate, tax deduction, secured loan, unsecured loan
**URL:** https://complete.tools/home-equity-vs-personal-loan

## How it works

The tool calculates outputs using the formula for monthly payments on loans, which is derived from the principal amount, interest rate, and loan term. For a fixed-rate loan, the monthly payment (M) can be calculated using the formula: M = P[r(1 + r)^n] / [(1 + r)^n – 1], where P is the loan principal, r is the monthly interest rate (annual rate divided by 12), and n is the number of payments (loan term in months). The tool uses these calculations to compare total payments and interest amounts over the life of the loans based on the provided inputs.

## Who should use this

Homeowners considering refinancing options for better terms on existing mortgages. Financial advisors evaluating loan options for clients needing funds for renovations. Small business owners seeking a loan for operational costs without using business assets as collateral.

## Worked examples

Example 1: A homeowner wants to borrow $50,000 through a home equity loan with a 4% annual interest rate over 10 years. Monthly interest rate (r) = 0.04/12 = 0.00333. The number of payments (n) = 10*12 = 120. Monthly payment = 50000[0.00333(1 + 0.00333)^120] / [(1 + 0.00333)^120 – 1] = $505.88. The total payment over 10 years = $505.88 * 120 = $60,705.60. Total interest paid = $60,705.60 - $50,000 = $10,705.60. 

Example 2: A borrower considers a personal loan for $20,000 at a 10% interest rate over 5 years. Monthly interest rate = 0.10/12 = 0.00833. Number of payments = 5*12 = 60. Monthly payment = 20000[0.00833(1 + 0.00833)^60] / [(1 + 0.00833)^60 – 1] = $425.11. Total payment over 5 years = $425.11 * 60 = $25,506.60. Total interest paid = $25,506.60 - $20,000 = $5,506.60.

## Limitations

The tool assumes fixed interest rates for both loan types, which may not reflect variable rate changes. It does not account for potential fees such as origination fees, closing costs for home equity loans, or prepayment penalties. The calculations are based on standard amortization formulas and may not include local taxes or insurance associated with home equity loans. Results may be less accurate for loans with unconventional terms or for borrowers with poor credit histories, as these factors may significantly affect the actual interest rates offered.

## FAQs

**Q:** How does the home equity loan interest rate typically compare to personal loan rates?


**A:** Home equity loans generally have lower interest rates than personal loans due to the collateral provided by the home, reducing lender risk.


**Q:** Are the payments for home equity loans tax-deductible?


**A:** Interest paid on home equity loans may be tax-deductible if the funds are used to buy, build, or substantially improve the home that secures the loan, subject to IRS rules.


**Q:** Can I use a personal loan for home improvements?


**A:** Yes, personal loans can be used for home improvements, but they generally come with higher interest rates compared to home equity loans, which might be more cost-effective for larger projects.


**Q:** What happens if I default on a home equity loan?


**A:** Defaulting on a home equity loan can lead to foreclosure, as the loan is secured by the home, allowing lenders to reclaim the property to recover their losses.

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