A home equity loan almost always carries a lower interest rate than a personal loan. That fact leads a lot of people to the wrong conclusion, because two things get overlooked: the term is usually much longer, and the collateral is your house.
Here’s how the two actually compare, with the arithmetic that shows when the cheaper rate costs more.
The core difference
A personal loan is unsecured. No asset backs it, so approval rests on your credit score, income and debt-to-income ratio. Terms typically run one to seven years.
A home equity loan is secured against your property. You borrow a lump sum against the difference between your home’s value and your mortgage balance, usually over 5 to 30 years.
The rate gap exists for one reason: with a home equity loan, the lender can take the house. You’re being paid to accept that risk.
Home equity loan or HELOC?
Worth separating, because they’re often discussed as one thing.
A home equity loan gives you a lump sum at a fixed rate with fixed payments. Predictable, and suited to a known cost.
A HELOC is a revolving credit line secured on your home, usually at a variable rate. You draw what you need during a draw period — often ten years, sometimes interest-only — then repay over a repayment period.
The HELOC risk people miss: when the draw period ends, payments can jump sharply as you switch from interest-only to principal-and-interest. A borrower comfortably paying $300 a month can face $900 overnight. The Consumer Financial Protection Bureau publishes guidance on how these work.
Use a home equity loan for a known amount, a HELOC for staged costs like a renovation with uncertain scope.
What each actually costs
| Personal loan | Home equity loan | |
|---|---|---|
| Typical APR | ~7% – 36% | Considerably lower |
| Collateral | None | Your home |
| Typical term | 1–7 years | 5–30 years |
| Upfront costs | Origination 0–8% | Closing costs ~2–5% |
| Time to funding | 1–7 days | 2–6 weeks |
| Worst case if you default | Credit damage, collections | Foreclosure |
Note the funding time. If the expense is urgent — a failed boiler in January — a home equity loan may simply be too slow regardless of the rate.
When the lower rate costs more
This is the calculation that changes people’s minds. Take $40,000.
Personal loan at 12% over 5 years: payments of about $890 a month, roughly $13,300 in total interest.
Home equity loan at 8% over 15 years: payments of about $382 a month, roughly $28,800 in total interest — plus closing costs of perhaps $1,200.
The home equity loan more than halves the monthly payment and costs over twice as much in total. A third less interest per year, stretched across three times as many years.
Now match the terms. Home equity loan at 8% over 5 years: payments of about $811, and roughly $8,600 in interest. Now it genuinely wins.
So the rule isn’t “secured is cheaper.” It’s compare total interest over the same term, then decide whether a longer term is worth what it adds.
The US tax rule that changed
Home equity interest deductibility is widely misunderstood, and the old advice is out of date.
Since the 2017 tax law, interest on home equity debt is deductible only if the funds are used to buy, build or substantially improve the home securing the loan — and only within the overall mortgage debt limits.
That means using a home equity loan for debt consolidation, tuition, a wedding or a car is not deductible, even though the loan is secured on your house. A lot of older content still implies otherwise. Current rules are published by the IRS.
The practical effect: the tax argument for home equity borrowing only applies to home improvement. For everything else, compare the rates straight.
How much you can actually borrow
Lenders generally require you to retain equity — commonly they’ll allow total borrowing up to 80–85% of the home’s value, including your existing mortgage.
On a $400,000 home with a $250,000 mortgage at an 85% limit, that’s $340,000 total, leaving about $90,000 available.
You’ll also need an appraisal, which you usually pay for, and the valuation may come in below what you expected. That’s a common reason applications shrink or fall through.
Which to choose
A personal loan fits when you need money within days, you don’t own a home or have limited equity, the amount is modest, you can repay within a few years, or you’re unwilling to put your home at risk for any reason.
A home equity loan fits when you’re funding a substantial home improvement, you need a larger sum than personal lenders offer, you have meaningful equity and stable income, and you can commit to the full term.
Neither fits when the underlying problem is spending above income. Both restructure debt; neither reduces it.
The consolidation question
Using home equity to clear credit card debt is the most common use case and the one requiring most caution.
On paper it’s compelling — swap 22% card interest for something far lower. Two things get lost:
You’re converting unsecured debt into secured debt. Miss card payments and your credit suffers. Miss payments on a home equity loan and you can lose the house.
And you’re stretching a three-year problem across fifteen years. Even at a much lower rate, total interest can exceed what you’d have paid.
There’s also a well-documented pattern: people consolidate, the cards show zero, and within eighteen months there’s new card debt alongside the home equity loan.
Compare it honestly against the alternatives first — our guides to credit card debt consolidation and balance transfers versus personal loans cover options that don’t involve your home.
Outside the United States
United Kingdom. The equivalent is a second charge mortgage, also called a secured or homeowner loan. These are FCA-regulated, and lenders must assess affordability. Rates sit below unsecured personal loans, and repossession is the risk. Note that representative APR on personal loans applies to only 51% of accepted applicants — see our guide to getting approved for a UK personal loan.
Canada. HELOCs are common and often bundled with the mortgage as a readvanceable product. Combined borrowing is generally capped around 80% of property value.
Europe. Second-charge lending is less developed in several markets, and remortgaging to release equity is more usual. Prepayment penalties vary sharply by country.
Before you apply, either way
Improve your credit first. Both products price on it, and utilization moves fastest — see what to do in the months before applying.
Pre-qualify with soft searches to see real offers without hard inquiries.
Compare APR, not the interest rate. APR includes fees and is the only honest comparison.
Calculate total interest over the full term, not the monthly payment.
Keep an emergency fund intact. Taking a secured loan with no cash buffer means the next surprise threatens the collateral — see our emergency fund guide.
Frequently asked questions
Which has lower interest?
Home equity, almost always, because it’s secured. Whether it costs less depends on the term, not the rate.
Can I get a home equity loan with poor credit?
Sometimes, since the equity reduces lender risk — but expect worse terms. Equity isn’t a substitute for affordability.
Is home equity interest tax deductible?
In the US, only when used to buy, build or substantially improve the home securing the loan. Not for consolidation or other spending.
What happens if I sell the house?
The home equity loan is repaid from the sale proceeds, like your mortgage. A personal loan is unaffected by the sale.
The bottom line
Don’t choose on the rate. Get quotes for both, calculate total interest over the same term, and add the closing costs.
Home equity borrowing wins clearly for large, long-lived expenses — particularly home improvements, where it’s also the only case with a US tax advantage. Personal loans win for speed, smaller sums, and anything you can clear within a few years.
And be deliberate about the collateral. The lower rate exists precisely because the lender can take your house. For an improvement that adds lasting value that’s a reasonable trade. For a holiday or a wedding, it isn’t.
Sources
- IRS Publication 936 — home mortgage interest deduction, including the buy, build or substantially improve test
- CFPB on HELOCs — draw periods and the payment increase at repayment
- FCA — UK second charge mortgage regulation
APR ranges, closing costs and equity limits reflect typical lender practice and vary by provider and credit profile. Confirm your actual terms in writing before borrowing against your home.
Last reviewed: 15 August 2026. Rates, equity limits and tax rules change — we review this article when they do.
General information only, not personalised financial or tax advice. Rates, fees, equity limits and tax rules vary by lender and country and change over time. Speak with a licensed adviser before borrowing against your home.
