When deciding which type of loan to choose, you need to consider all the information required for the application to avoid delays when submitting it. The two most common loan products currently trending in the market are a home equity loan and a personal loan. Both have their advantages and disadvantages.
Don’t know which one to pick?
There are a couple of variables on which the answer rests, and they all have to do with your financial circumstances. Let’s break it down for you:
Understanding a Personal Loan
A personal loan is an unsecured loan that borrowers can apply for online from lenders such as Pocket Cash. One of the best things about this loan is that it does not require collateral such as your car, house or valuables.
A personal loan can be used for the following expenses:
- Debt consolidation
- Home improvement
- Wedding expenses
- Medical expenses
- Financing large purchases such as a car or boat
- Travel
Personal loan terms are usually between 12 weeks and two years. Some lenders offer a period of up to 5 years. However, not many borrowers opt for the latter because the longer it takes to pay the loan, the higher the interest rate will be.
Typically, the APR on a personal loan starts from 4% and can go as high as 48%. As for the loan amount, it’s from $100 to $15,000.
How a Personal Loan Works
Another point in favour of a personal loan offered by online lenders such as Pocket Cash is that it can take a couple of minutes or a week for the loan application to get approved. Personal loans are often given on bad credit too. If a borrower does not have a ‘Good’ credit score, the lender considers other factors such as annual income, ID and a permanent address in the state they live in.
Once your application gets approved, the lender sends money into your account, which you can start using immediately. If your repayments are set to a monthly schedule, the first one will be due when your next paycheck arrives.
A few lenders charge an origination fee, which is around $200.
Here’s an example to help you understand the total cost:
You are applying for a loan amount of $1,000. The loan terms are six months, and you choose to make the payments over 25 weeks. The APR on this loan is 4%, which amounts to $240. The lender charges an origination fee of $200.
$1,000 (Principal Amount) + $200 (20% Origination Fee) + $240 (4% APR) = $1,440 (Total Amount)
Weekly Payments: $57.60
Is a Personal Loan Right for Me?
Since a personal loan offers you a couple of thousand dollars, its application is hassle-free. There’s no collateral, so you don’t have to worry about your property being seized. Lastly, despite the high interest rate, you get access to your loan in just a day, which is great when you are in an emergency.
Understanding a Home Equity Loan
A home equity loan allows you to borrow money against the equity you have accrued from your home. It is based on your remaining mortgage and the percentage of the house you own.
Compared to a personal loan, a home equity loan can be a little bit risky since you use your house as collateral. Often, this loan is referred to as a second mortgage, which is why it takes time to process.
To be eligible for this loan, you need a good credit score, as well as fair credit history. Lenders want to make sure that on top of the mortgage that you are already paying, will you be able to afford a second loan or not.
One of the biggest drawbacks of a home equity loan is that your home will be seized if you default on the payment. However, this loan has a lower interest rate and more extended periods, and it offers tax benefits. If you use the loan for home improvements, the interest rate for that amount will be tax-deductible.
Which One to Choose?
Based on your financial circumstances, either one of these loans can prove right for you. If you receive a big paycheck, you can afford the high interest payments and avoid putting up your asset as collateral. However, if you need a large amount to pay for your ongoing medical bills, a home equity loan is right for you.
