Why a Personal Loan Could Be a Safer Way to Borrow Than a Home Equity Loan

The risks just aren't the same.

There may come a point when you need to borrow money. And if so, you may be inclined to tap your home equity to do so. If you have equity in your home, you can either borrow a lump sum of money via a home equity loan or get access to a home equity line of credit (HELOC), which you can withdraw from as needed for years. 

Both options are relatively affordable and easy to qualify for as long as the equity in your home is there. But of the two, a home equity loan may be a better bet because that way, you lock in a fixed interest rate on the sum you borrow. With a HELOC, your interest rate could rise over time -- and so could your payments. 

But while tapping your home equity may be especially viable these days with home values being up on a national level, you may want to look at a personal loan for your borrowing needs instead. Here's why.

It's all about mitigating risk

Any time you borrow money, there's a risk you'll end up falling behind on your payments. You can minimize that risk by doing your best to only borrow a sum you're confident you can repay, but sometimes, circumstances can change. You might lose your job or have your income take a hit. And that could make it harder to keep up with loan payments that were once manageable for you.

That's why a personal loan may be a safer bet for borrowing money than a home equity loan. Home equity loans are secured by -- wait for it -- the homes being borrowed against. What this means, though, is that if you fall too far behind on your payments, you could technically run the risk of losing your home. 

With a personal loan, that won't happen. That's because personal loans aren't secured by a specific asset. You might face a higher borrowing rate with a personal loan than a home equity loan because of that. But if you fail to make payments as scheduled on your personal loan, you won't risk losing the roof over your head.

To be clear, falling behind on a personal loan can still have negative consequences. It could damage your credit score and make it very difficult to borrow in the near term. But losing your home won't be a risk in that scenario. 

Should you avoid a home equity loan?

If you decide to choose a personal loan over a home equity loan, you may be in good company. In a recent TD Bank survey, among homeowners looking to consolidate their debt, 43% say they would prefer to use a personal loan over a home equity loan. And going a similar route might give you peace of mind. 

Tapping your home equity can be a very unsettling thing. If it's not something you're comfortable with, then it certainly pays to explore other options for borrowing -- even if you end up with a slightly higher interest rate.