Home equity loan vs. personal loan: Which will be better for 2025?

There’s no shortage of borrowing options to choose from at the start of 2025. Unfortunately, in today’s inflationary climate, most come saddled with high interest rates that don’t appear likely to decline anytime soon. Understanding this dilemma, many are wondering about their personal loan options and, for homeowners, their home equity loan alternatives. Both personal loans and home equity loans, in particular, offer borrowers unique benefits right now and compared to the record-high rates credit cards come with, they’re two of the less expensive ways to borrow money right now.

In the developing economic climate of 2025, however, there’s arguably just one that’s more advantageous, and that’s a home equity loan. Below, we’ll explain why a home equity loan could be better for borrowers in 2025 (and what to consider if you’re committed to a personal loan).

Start by seeing how much you could borrow with a home equity loan here.

Home equity loan vs. personal loan: Which will be better for 2025?

While, in some instances, a personal loan may be preferable for borrowers this year, there’s a compelling case to be made for choosing a home equity loan instead. Here’s why: 

Lower interest rates: If you want to pay as little as possible to borrow money, a home equity loan is likely your top choice. With interest rates on home equity loans in the 8% range, they’re currently around five points lower than what you can secure with a personal loan (which averages over 12% right now). A lower interest rate is always critical, particularly when borrowing a potential six-figure sum of money, as many homeowners can easily do right now thanks to an average home equity amount worth $320,000.

See what home equity loan rate you could qualify for now.

Easier access: While you can, technically, qualify for a $100,000 personal loan, the process won’t be easy and that’s largely due to the lack of collateral in the borrowing exchange for this non-secured type of loan. Home equity loans don’t have the same restrictions as your home functions as collateral. Eligibility requirements are clearer, then, as the lender can easily determine your home’s value (via an appraisal) and, thus, the amount of equity you have to potentially utilize. This will make access to your funds quicker, too, with some lenders closing on the loan and disbursing funds as soon as two weeks.

Tax advantages: Interest on a home equity loan, according to the IRS, is “deductible only if the borrowed funds are used to buy, build, or substantially improve the taxpayer’s home that secures the loan.” In other words, if you use the home equity loan funds for IRS-eligible home projects, you may qualify for a tax deduction when you file your tax return for the year in which the money was used. This can both save you a significant amount of money and slightly reduce concerns over today’s interest rates if you know that the interest paid may be deductible.

That all noted, in some instances a personal loan, despite these drawbacks, can be preferable for some borrowers. Here are two reasons why:

Quicker disbursement: While some home equity loan lenders may disburse funds in just two weeks or so, it’s not uncommon for it to take two months or longer. Applicants will need to shop for lenders, apply for a loan, complete an appraisal, provide follow-up documentation, and, eventually, close on the loan. Some of these steps are cut completely from the personal loan process, where credit score and credit history play critical roles. And that may result in quicker disbursement.

Protect your home: Even though home equity loan rates are materially lower than personal loan rates, those savings are based on your home serving as collateral. This inherently makes home equity borrowing risky, then, should you be unable to repay all that you’ve withdrawn. Personal loans don’t come with this risk, however, and, for some, the lower interest rate may not be advantageous enough that it’s worth putting their home on the line. If you want to protect your most prized financial asset, then, a personal loan may be better.

Explore your personal loan options here.

The bottom line

Both home equity loans and personal loans have unique pros and cons that borrowers should contemplate before applying for either in 2025. In many circumstances, a home equity loan may be more applicable but, in some others, a personal loan may work out better. Borrowers won’t know which is optimal for their situation, however, without exploring both. Just consider starting now if you already know you’ll need the funds later this year.