Sometimes bad luck and unfortunate events can and do happen without warning. You never know when a sudden layoff might happen to you or you might be required to meet a very large medical expense.
These situations can be very scary, but you do have many options available to help you navigate these treacherous financial waters.
This article will walk you through the best options to consider and highlight the benefits and tradeoffs of each option.
- Instantly check your personal loan interest rate with Upstart. Checking your score does not impact your credit rating.
Home Equity Loan
If you’ve owned property for a number of years, your property is likely to have accrued equity. This equity is only available to you if you sell the property and use the proceeds to repay the mortgage.
An alternative option is to access that equity using a home equity loan. With a home equity loan, you have two main options: a single large lump sum home equity loan or a home equity line of credit.
Single Lump Sum
The home equity loan option will provide you with a single lump sum cash payment. The loan terms will include a fixed interest rate and a repayment period that can extend for up to 10 years.
Home Equity Line of Credit
In contrast, a home equity line of credit allows you to borrow various amounts of money up to a specific credit limit.
Home equity lines of credit include variable interest rates charged against any amount that you borrow against. Any draws made against your home equity line of credit will require you to make regularly scheduled repayments with a specific maturity date.
How to Calculate Available Home Equity
Your home equity value is calculated by subtracting your home’s market value from your outstanding mortgage balance.
Lenders will typically allow you to borrow up to 80% of your home equity value. The easiest way to understand this is with an example:
- You paid $100,000 for your home 4 years ago.
- You made a $20,000 down payment (20%) and took an $80,000 mortgage.
- The house has a $120,000 market value.
- The mortgage has a $70,000 outstanding balance.
In that example, your home equity equals $50,000 ($120,000 home market value – $70,000 mortgage balance).
If a lender will provide you with an 80% home equity line, your total home equity line is $40,000 ($50,000 home equity value multiplied by 80%).
Accessing the Funds
The main benefits of a home equity loan include access to 100% of the loan proceeds upfront.
This type of of loan would be good for a situation when you need to meet an unexpected large cash expense for medical costs or even education expenses.
Home equity lines of credit are ideal for situations when you might need to meet regular ongoing expenses like quarterly tuition payments.
Lenders will typically allow you to borrow up to 80% of the market value of your property.
Benefits
- Home equity loans include some of the lowest interest rates available because they are secured by your property.
- These loans include very flexible repayment terms that can include up to a 10 year maturity date.
- Once you have an approval for a home equity line of credit, future draws on your home equity will have instant approval and you can often receive the proceeds within 1 day.
Considerations
- Home equity loans are secured by your property. If you default on your home equity loan, the lender can re-possess your property.
- Home equity loans can require an appraisal of your property which can increase the time it takes to get an approval.
- Your loan approval will include a credit check and income verification.
Top Home Equity Lenders
Most home equity lenders are traditional financial institutions like banks and credit unions. Online based lenders have more recently entered the market by offering lower interest rate options than traditional brick and mortar lenders. Other online loan aggregators have created online market places where you can compare offers from multiple lenders at one time.
LendingTree
LendingTree offers a unique online marketplace that allows you to instantly compare quotes from multiple lenders. All you need to do is input some basic borrower information and you will receive multiple loan offers that you can immediately compare.
Comparing rate options with LendingTree only counts as a soft credit inquiry which doesn’t stay on your credit report. If you decide to accept a home equity loan, you will be required to complete a hard credit inquiry which will be reported on your credit report.
Personal Loans
The next major source for urgent cash loans is a personal loan. Personal loans are unsecured obligations. This means you won’t be at risk of losing your property or other collateral if you default on the loan.
However, because personal loans are unsecured, these loans will carry higher average interest rates than a home equity loan.
Approval for personal loans will be based on your personal credit score and will require a minimum amount of verified income.
Loan Purposes
Personal loans are most frequently used to finance the following:
- Large purchases such as a vehicle, consumer product, or home improvement.
- Refinance credit card debt.
- Cover medical expenses.
- General debt consolidation.
Loan Terms
Personal loans are typically available in amounts ranging from $1,000 to $35,000. The loans are typically issued for 3 to 5 years and require monthly payments.
Principal Repayment
Personal loans are amortized which means the principal amount you borrow is repaid through a series of equal payments. Each loan repayment includes both interest and a portion of the principal.
As more principal is paid down, the amount of the interest is reduced and a larger portion of the payment is used to repay the principal balance.
Interest Rates
All lenders are required to provide borrowers with the annual percentage rate (APR) of a loan. The annual percentage rate includes the interest rate of the loan plus any fees charged.
The easiest way to understand this difference is with a simple example.
APR vs Simple Interest Rate Example
Assume you are considering a 1 year $2,000 personal loan. You are deciding between two options:
- Bank 1 offers a $2,000 personal loan with a 10% interest rate.
- Bank 2 offers a $2,000 personal loan with an 8% interest rate and a 5% origination fee ($100).
At first glance it actually looks like Bank 2 is offering a better deal. But when you compare the loan options using an APR rate, a different picture emerges:
- Bank 1 APR is 10% ($200 / $2,000 = 10%).
- Bank 2 APR is 13% ($160 + $100) / $2,000 = 13%.
When you calculate the APR, you have to include the interest cost and any fees.
Because bank 2 has a 5% origination fee, you need to add that $100 origination fee with the 8% interest rate of $160 which results in $260 of total interest and charges.
How to Compare Personal Loan Interest Rate Options
Always compare personal loan options based on the annual percentage rate. Lenders are required to provide this rate, so make sure you find that rate.
Your APR percentage will include any loan fees as well as your overall interest rate. This percentage is the only way to determine which loan option really has the lowest interest rate.
- See our Long Term Personal Loan guide for more information about loan options.
Credit Score Impact
It’s important to keep in mind that comparing potential personal loan rates will not impact your credit score.
The reason comparing rates will not impact your credit score is because the lenders are only completing a soft credit inquiry when you compare interest rates.
Filling out an application and comparing rates only triggers a soft credit inquiry which does not effect your credit score.
If you do decide to accept a personal loan, that will trigger a hard credit inquiry. A hard credit inquiry does get counted as a credit inquiry on your credit report.
For more information on your personal credit score, see our personal credit score guide.
Approval Requirements
Online lenders typically require a credit report and FICO score.
Your FICO score will be the basis for how much money you can borrow and at what interest rate you will be charged.
Benefits
- Personal loans do not require collateral.
- Approval process can be completed within online within a few minutes.
- Many personal loans can be funded within 24 hours.
- You can compare multiple options online without impacting your credit score.
Considerations
- Personal loans have higher average interest rates than home equity loans.
- Your personal credit score will determine what interest rate is available to you.
- Always compare personal loan options based on the APR.
Top Personal Loan Options
Online personal loans are typically available from financial institutions or through peer to peer lending.
Financial institutions include commercial banks, savings institutions, and credit unions. These institutions use funds that are left on deposit and lend them out to borrowers at a slightly higher rate than they pay for the savings deposits.
Peer to peer lenders are a more recent source of personal loans. These online business receive funds from individual investors and use those funds for personal loans.
Upstart
Upstart is an innovative online lending platform that considers your education and work experience in addition to your personal credit score when determining your final interest rate.
The reason this is important is because Upstart can potentially offer you a lower interest rate based on your education and work experience.
- Available loan amounts of $1,000 to $50,000.*
- If you accept a loan before 5pm eastern standard time, you will receive the loan proceeds on the next business day.*
- No prepayment penalties if you repay your loan early.
- Checking your rate only triggers a soft credit inquiry.*
You can also compare Upstart vs Payoff and Upstart vs Lendingtree.
Payoff
Payoff takes a holistic approach to financial wellness and helps you develop stronger financial habits. All borrowers receive free monthly FICO score updates.
Payoff reports that borrowers who have used their personal loans to repay credit card debt typically see average FICO score increases of at least 40 points.
- Loans amounts ranging from $5,000 to $35,000.
- Maturity dates ranging from 2 years to 5 years.
- Origination fees ranging from 0% to 5% depending on your credit risk.
- No prepayment fees.
Payoff considers the following criteria in its approval process:
- 640 or higher FICO score.
- 50% or less debt to income ratio.
- 3 years of higher average credit age.
- No current credit delinquencies greater than 90 days within the last 12 months.
Borrowers also have access to a dedicated customer service line and Payoff offers job loss support.
In the event that you lose your job, if you contact Payoff directly, they will work with you adjust your payment schedule.
See Payoff vs Prosper for more personal loan comparisons.
Upgrade
Upgrade was founded in 2006 as an online based lender. Upgrade offers customers comprehensive credit monitoring and education in addition to low cost personal loans.
Most uniquely, Upgrade offers a standard personal loan as well as a personal credit line.
With a personal credit line, you will have instant access to approved loan funds whenever you need them. You only pay interest on amounts that you draw from your personal credit line.
There are no origination fees and no fees to open the personal credit line or any fees for a draw on an existing personal credit line.
- Personal credit line or personal loans available up to $50,000.
- Personal credit line draw length of up to 36 months.
- Equal monthly payments for each draw.
- No origination fees or credit line fees.
- Instant access to funds anytime you need them after being approved for a personal credit line.
- Interest is paid only when you use a personal credit line.
