Should You Use a Personal Loan or HELOC

                                   

Today there are many options available to make a purchase: cash, prepaid cards, checks, credit cards, debit cards, loans, personal loans, home equity line of credit (HELOC) and more. With all these choices, it can be difficult to decide which payment method to choose. However, paying with cash will always save you money and offer the most negotiating power.

When it comes to making home improvements there are two types of loans you can choose from: secured and unsecured. An asset such as home secures secured loans. Unsecured loans are not secured by an asset and are riskier for lenders. Borrowers are evaluated based on credit scores.

Homeowners can use an unsecured loan such as a personal loan also known as a signature loan or use a secured loan such as a HELOC to pay for home repairs. Personal loans are loans offered by a bank or financial institution. You get a fixed amount of money in a lump sum and pay the money back over time through monthly payments. 

Mortgage companies or financial institutions allow homeowners to borrow money using the home’s equity as collateral called HELOCs also known as a second mortgage. HELOCs let you convert your home equity into cash, which can be used for home improvements, starting a business, debt consolidation, college education, or other expenses.

A HELOC works similar to a credit card because it has a revolving balance that allows you to borrow up to a specific amount for the life of the loan. You must repay the loan in full when you sell the home.

Get all the facts and ask questions when deciding between using a personal loan or HELOC. Here are the advantages of using a personal loan versus using a HELOC.

Personal Loan

1. Quicker approval times
2. Shorter terms
3. You don’t have enough equity in your home
4. You don’t want to use your home as collateral
5. Easier to qualify for
6. No fees
7. You know the loan’s full cost upfront and how much you are borrowing
8. Fixed interest rate
9. Fixed monthly payment

HELOC

1. You aren’t concerned about a fixed rate
2. Approval for large amounts
3. Interest payments may be tax deductible
4. Can borrow money periodically
5. More flexibility to use money as needed
6. Interest paid over time may be lower

An Alternative to Traditional Lending

Although the recession had ended many Americans are searching for various ways to get extra money to make ends meet, get out of debt, or buy items they need or want.  Some Americans use risky high interest options such as payday loans or debt consolidation.  Many Americans now have bad credit due to unemployment or due to lack of a savings account.   

This makes it difficult to obtain approval for a loan or credit card.  An alternative to traditional lending is peer to peer lending, social lending or person to person lending. Borrowers and lenders transact business without using a traditional bank over the internet.

Peer to peer loans can be obtained from several companies such as: Prosper, Zopa, Dwolla, Lending Club and Microplace that provides (loans to people in other countries) loans to people in Canada, Australia and New Zealand.

Peer to peer loans offer products similar to banks such as: are real estate loans, personal loans, business loans, debt consolidation, loans to pay off credit card debt and more. The average loan amount approved is $7,000. The lenders make money on loan origination fees instead of interest payments so they constantly need repeat or new users. Americans make 6 million peer to peer loans a year.

Loans are based on collateral, credit score and personal assets. Owning property and having equity in a property can be used as collateral for a loan. Your credit score has to be at least 620. Your chances of approval are also better if you have some money in the bank. If you default on the loan you lose your equity and/or your money in the bank.

There are two main types of lending models used: marketplace and the family or friend model. The marketplace model enables lenders to located borrowers and vice-versa. This model connects borrowers with lenders where the lender that is willing to provide the lowest interest rate wins the borrower's loan. The family and friend model is based on borrowers and lenders who already have a business relationship or business co-workers who formalize a personal loan.

Many of the sites password protect their data and are PCI compliant. If a lender suspects that one of their loans belongs to a person who has committed ID theft, they will work with law enforcement authorities to track down and prosecute anyone who has committed identity theft. However, there are risks to the lenders and borrowers both in terms of loan defaults and fraud.