Home Equity Loan vs. Personal Loan for Debt Payoff

If you own a home and you’re carrying high-interest debt, you’ve probably wondered whether borrowing against your house could save you money. Home equity loans often come with lower rates than personal loans — but they also come with a risk that changes everything: you could lose your home.

Here’s a clear look at both options so you can make the right call.

Quick Comparison

	Home Equity Loan	Personal Loan
Interest rate	6-9% (fixed, as of 2025-2026)	7-36% (fixed, depending on credit)
Loan terms	5-30 years	2-7 years
Collateral	Your home	None (unsecured)
Tax deductible?	Only if used for home improvements	No
Approval requirements	Good credit + sufficient home equity (typically 80-85% max LTV)	Good credit + stable income
Closing costs	2-5% of loan amount	0-8% origination fee (many lenders charge 0%)
Credit score needed	Typically 680+	Typically 580+
Funding speed	2-6 weeks	1-7 days
Risk if you can’t pay	Foreclosure — you lose your home	Collections, credit damage, potential lawsuit

How a Home Equity Loan Works

A home equity loan lets you borrow against the value you’ve built up in your home. If your house is worth $300,000 and you owe $200,000 on your mortgage, you have $100,000 in equity. Most lenders let you borrow up to 80-85% of your home’s value minus what you owe, so in this case you could potentially borrow up to $55,000.

You receive the money as a lump sum and repay it in fixed monthly installments over a set term, usually 5-30 years. The rate is fixed, typically ranging from 6-9% in the current market. That’s significantly lower than credit card rates, which average around 22-24%.

Why the rate is lower: The lender has your house as collateral. If you stop paying, they can foreclose. That security for the lender translates into a lower rate for you.

Don’t confuse this with a HELOC: A home equity line of credit (HELOC) is a revolving credit line with a variable rate. A home equity loan is a one-time lump sum with a fixed rate. For debt consolidation, the fixed-rate home equity loan is generally simpler and more predictable.

How a Personal Loan Works

A personal loan is an unsecured loan — no collateral required. You apply through a bank, credit union, or online lender, receive the funds, and repay in fixed monthly installments over 2-7 years.

Rates range widely depending on your credit. With excellent credit (740+), you might get 7-10%. With fair credit (580-669), expect 15-25% or higher. Some lenders go up to 36%.

The upside: Nothing is at risk except your credit score if you stop paying. No one can take your house, your car, or any other asset.

When a Home Equity Loan Wins

A home equity loan is typically the better choice when:

• You have a large amount of debt. If you’re consolidating $25,000 or more, the interest rate difference between a home equity loan and a personal loan becomes significant. On $40,000 of debt, the difference between 7% and 14% is roughly $12,000 in total interest over 5 years.
• You have excellent credit and significant equity. You’ll qualify for the best rates and the highest loan amounts.
• You want a long payoff timeline. Home equity loans can stretch to 15 or even 30 years, which lowers monthly payments substantially. A $30,000 loan at 7% costs about $270/month over 15 years versus $594/month over 5 years.
• You’re confident in your ability to make payments consistently. This isn’t the time for optimistic thinking. You need to be certain you can make every payment, because your home is on the line.
• Your debt interest rates are very high. If you’re paying 22%+ on credit cards, dropping to 7% with a home equity loan saves a lot — even after accounting for closing costs.

When a Personal Loan Wins

A personal loan is typically the better choice when:

• You don’t want to risk your home. This is the biggest factor. Converting unsecured debt (credit cards) into secured debt (home equity loan) means a financial setback could cost you your house. If there’s any uncertainty about your income or ability to pay, keep the debt unsecured.
• Your debt is under $25,000. For smaller amounts, the rate difference between a home equity loan and a personal loan may not justify the closing costs and risk. A $10,000 personal loan at 10% over 3 years costs about $1,600 in interest — manageable without putting your home on the line.
• You want to pay off debt quickly. Personal loan terms max out at 7 years, which forces faster payoff. Home equity loans can stretch to 30 years, and it’s tempting to choose a long term for the lower payment — but you’ll pay far more in interest.
• You don’t have much equity in your home. If your loan-to-value ratio is already above 80%, you probably won’t qualify for a home equity loan anyway.
• You need money fast. Personal loans often fund within 1-3 business days. Home equity loans require an appraisal, title search, and other steps that take 2-6 weeks.

The Tax Question

You may have heard that home equity loan interest is tax-deductible. That was broadly true before 2018, but the Tax Cuts and Jobs Act (TCJA) of 2017 changed the rules significantly.

Current rule: You can only deduct home equity loan interest if you use the borrowed funds to “buy, build, or substantially improve” the home that secures the loan. Using a home equity loan to pay off credit card debt does not qualify for the deduction.

So if you’re counting on a tax break to make the home equity loan math work, run the numbers again without it. For debt consolidation purposes, there’s no tax advantage.

The Closing Cost Factor

Home equity loans come with closing costs that personal loans usually don’t. Expect to pay:

• Appraisal fee: $300-600
• Title search and insurance: $150-1,000
• Attorney fees: $500-1,000
• Recording fees: $25-250
• Application/origination fees: 0-2%

On a $30,000 home equity loan, closing costs might total $1,500-3,000. That eats into your interest savings. Make sure you factor closing costs into your comparison — a personal loan with no origination fee and a slightly higher rate might actually cost less when you account for upfront fees.

Some lenders offer home equity loans with no closing costs, but they usually make up for it with a slightly higher interest rate.

A Critical Warning

Here’s the most important thing to understand about this decision: when you use a home equity loan to pay off credit card debt, you’re converting unsecured debt into secured debt.

Credit card debt is stressful, but it can’t take your house. A home equity loan can.

If you have a history of running up credit card balances, this conversion is especially risky. The pattern often looks like this: you take out a home equity loan, pay off the cards, feel relieved, and then gradually start using the cards again. Now you have both the home equity loan and new credit card debt — and your house is at risk.

Be brutally honest with yourself about whether you’ve addressed the spending habits that created the debt in the first place. If the answer is “not really,” a personal loan is the safer choice.

The Math: A Side-by-Side Example

Say you have $30,000 in credit card debt at an average rate of 22%.

Option A: Home equity loan at 7% for 10 years

• Monthly payment: $348
• Total interest: $11,800
• Closing costs: ~$2,000
• Total cost: $13,800
• Risk: Your home

Option B: Personal loan at 11% for 5 years

• Monthly payment: $652
• Total interest: $9,100
• Origination fee: $0 (many lenders)
• Total cost: $9,100
• Risk: Credit damage only

The home equity loan has lower monthly payments but higher total cost — and your home is collateral. The personal loan costs less in total interest, pays off faster, and keeps your home safe. Higher monthly payment, but you’re done in 5 years instead of 10.

Frequently Asked Questions

Can I use a HELOC instead of a home equity loan for debt consolidation?

You can, but it’s riskier. HELOCs have variable rates, which means your payment could increase if rates go up. For debt consolidation, a fixed-rate home equity loan is usually more predictable. The exception is if you have a specific plan to pay off the balance within 1-2 years during the HELOC draw period.

How much home equity do I need to qualify?

Most lenders require a combined loan-to-value ratio (CLTV) of 80-85% or less. That means your existing mortgage plus the new home equity loan can’t exceed 80-85% of your home’s appraised value. If your home is worth $300,000, your total secured debt (mortgage + home equity loan) typically can’t exceed $240,000-$255,000.

Will a home equity loan affect my ability to sell my house?

It adds a second lien on your property. When you sell, both your mortgage and the home equity loan must be paid off from the proceeds. If your home’s value has dropped and you owe more than it’s worth, selling becomes complicated. Make sure you have enough equity cushion.

What happens if I default on a home equity loan?

The lender can foreclose on your home. In practice, they’ll usually try to work with you on modified payment terms first, but foreclosure is a real possibility. This is the fundamental risk of converting unsecured debt into secured debt.

Bottom Line

Choose a home equity loan if you have substantial debt ($25,000+), excellent credit, significant equity, and absolute confidence in your ability to make every payment. The lower rate can save thousands, but only if you’re disciplined enough to deserve the risk.

Choose a personal loan if you want to keep your home safe, have a moderate amount of debt, or prefer a shorter payoff timeline. The higher rate is the price of not putting your house on the line — and for most people, that trade-off is worth it.

When in doubt, go with the personal loan. The peace of mind of knowing your home is safe is worth more than a few percentage points on your interest rate.