3 Reasons to Choose a Personal Loan Over a Home Equity Loan for Home Upgrades

If you're making upgrades to your home, you may not have the cash to pay outright to do it. If you're going to borrow, you have a few options. A personal loan is one of those options. A home equity loan is another.

A home equity loan allows you to tap into the equity in your home -- or the portion of your home that you own outright. It can also be called a second mortgage, because you're borrowing against the value of your house. It may have a lower interest rate than a personal loan, and if you're using it to substantially improve the home guaranteeing the loan, you may even be able to deduct interest paid when you file your taxes (if you itemize, that is).

Despite these benefits of a home equity loan, you may want to opt for a personal loan instead. Here are a few big reasons why that's the case.

1. It can be faster to get approved for a personal loan

If you need access to money quickly, a personal loan is almost definitely going to be the better choice. Many personal loan lenders can provide funds within a few business days of the time you apply, or even the same business day.

Applying for a home equity loan is a much more time-consuming process. While some lenders offer loan approval and funding more quickly than others do, you can still expect it to take around two to six weeks to get your loan approval. If you don't have time to waste, waiting this long may not be an option for you.

2. You won't have to pay high upfront closing costs for a personal loan

When you take out a home equity loan, you're usually going to get hit with closing costs just like you did when you got your first mortgage loan to buy your home. These could cost as much as 2% to 6% of your loan amount, so if you are borrowing $100,000, you might have to pay as much as $6,000 in closing costs. That's a whole lot of money that you won't be able to put towards your home upgrades.

Personal loans usually don't cost you anything upfront. If you choose the right lender, you won't pay any origination fees and will end up being able to keep more of your borrowed money to pay for your home upgrades, instead of paying your lender.

3. You won't be putting your house at risk when you take out a personal loan

Finally, you have to consider the possibility of losing your home in the course of borrowing money. When you take out a home equity loan, your house is collateral. If you don't pay, the lender can initiate foreclosure and force the sale of your house.

If you have a personal loan, your home is not guaranteeing the loan. In most cases, the loan is unsecured. That means your lender just makes you promise to pay without getting a legal interest in your property if you stop making payments.

If you aren't comfortable putting your house on the line, a personal loan is a better bet.

It's important to consider each of these three factors before you decide on the right borrowing approach. By thinking about your timeline for the money, any upfront costs, and whether you're comfortable using your home to secure a loan, you can make a more informed choice about whether a personal loan or home equity loan is the best route for your home upgrade project.