When considering affordable loan products, one usually chooses between a home equity loan or a personal loan. After all, the products are two surefire ways for the borrower to accomplish their main goals.
You can use home equity loans and personal loans for various expenses, such as:
- Paying off credit card debt
- Wedding expenses
- Home remodelling
- Medical expenses
- Purchasing a car
While it’s established that getting a home equity loan or a personal loan are both viable options, how do you know which is best for you and your financial situation?
Let’s look at some of the significant distinctions between the two loans, so you have a better idea of which loan is perfect for your specific circumstances!
What is a Home Equity Loan?
A home equity loan is a type of secured loan that leverages your home’s equity (its present market value minus the remaining mortgage amount) as collateral. Your home equity is a valuable asset as unlocking it enables you to borrow an amount that is equivalent to or up to the value of home.
Here’s how to calculate your home equity:
Your home is currently valued at RM600,000. Keep in mind, however, that the maximum loan margin you’re allowed to borrow or refinance is 80% of your home’s value, which is RM480,000. In this situation, you still owe RM300,000 in the home loan. As such, you would be able to obtain a home equity loan of:
RM480,000 – RM300,000 = RM180,000
How Does a Home Equity Loan Work?
You can be eligible for a home equity loan if you have enough equity in your property and a good credit score. You can then apply for a home equity loan through your bank. Bear in mind that you’ll almost certainly need to pay certain legal or processing fees.
Thus, it’s essential to compare quotes between various banks as they may waive these additional costs. You should also see which bank provides a loan amount that caters to your needs and a repayment term as well as an interest rate that suits your budget.
When Should I Choose a Home Equity Loan?
You can opt for a home equity loan if you’re not eligible for a low-interest personal loan but have sufficient home equity. Once approved, the loan is typically granted in the form of a second mortgage, disbursed in one lump sum, and you are responsible for paying interest on the full balance.
Home equity loans provide lower interest rates than personal loans since they utilise your home as collateral. What’s more, you can deduct any interest paid on a home equity loan from your taxes if you use the funds for a home repair or improvement project, which is not possible with a personal loan.
However, be sure to make on-time payments. By using your home equity to borrow money, you’re basically putting your property on the line. This means that failure to oblige to the lender’s terms and conditions could lead to the loss of your property!
What is a Personal Loan?
While home equity loans are guaranteed by the equity you’ve developed in your home, personal loans are regarded as unsecured loans because they’re backed by nothing. Instead, your ability to obtain a personal loan is determined mainly by your income and credit score.
Compared to home equity loans, personal loans have higher interest rates due to their unsecured nature. Having said that, obtaining a personal loan might be significantly faster than obtaining a home equity loan because your property isn’t used as collateral, and it requires simpler procedures.
How Does a Personal Loan Work?
Depending on your lender, receiving approval or rejection for your personal loan application can take a week or even as fast as a few minutes. Once authorised, the lender will deposit the funds into your bank account as a single payment, typically within several days.
Repayment begins as soon as the loan is disbursed, and you will be charged interest on the entire loan amount, whether you utilise all or only part of it. Some lenders may also charge for personal loan origination and prepayment costs.
When Should I Choose a Personal Loan?
A personal loan works best if you want to borrow a relatively small amount. It’s also a great loan product to consider if you don’t own a property or if you’re a new homeowner.
For instance, you can opt for a personal loan for wedding expenses, vehicle financing, home repairs and more. Additionally, since you can receive funding in just a few business days or even minutes, personal loans are excellent as a form of debt consolidation and emergency cash assistance.
While there are many benefits to getting a personal loan, you should consider all your options. To elaborate, would it be better for you and your financial scenario if you were to get a car loan instead of a personal loan? You must also be sure that you’re able to afford monthly payments for your personal loan.
Home Equity Loan vs Personal Loan: A Comparison
|Financial situation||Home equity loan||Personal loan|
|I’m looking to borrow a large amount and have the equity to cover it||/|
|I’m not in a rush||/|
|I’m confident of repaying the loan and my mortgage without a hitch||/|
|My home value is increasing||/|
|I currently don’t own a home or have enough equity||/|
|I’m looking to borrow a relatively small amount||/|
|I need the money ASAP (as soon as possible)||/|
|I’m confident of repaying the loan fast||/|
Refinancing: A Strategic Financing Option
Cash-out refinance is different from other refinance methods as it uses your home as collateral for extra cash. As such, you can arrange a new loan for a bigger sum than the first loan and collect the difference between the two loans in tax-free cash!
Refinancing allows you to “cash-out” the increase by providing additional collateral for a larger loan. Check out our article on refinancing your housing loan to find out all you need to know before refinancing.
Cash-out refinance is a great option if your current mortgage rates are lower than what you’re paying. You can refinance your loan for a larger amount than you owe, then “cash out” the difference to cover the costs.
Cash-out refinances generally involve closing expenses and an appraisal, so make sure your timeframe and budget are planned before you go this route. You can then put the money towards a variety of things, like paying off other debts, remodelling your current home, or buying a new home.
Refinancing vs Personal Loan
If we were to compare refinancing to a personal loan, there are several factors to consider:
- Generally, refinancing offers a longer repayment tenure (up to 35 years) than personal loans (up to 7 years).
Monthly repayment amount
- Choosing between refinancing and personal loans also depends on your capability to make repayments. As personal loans come with a shorter repayment tenure and higher interest rates, you need to make sure that you can afford the monthly repayments.
- For instance, for a refinancing loan of RM100,000, you will need to pay RM413 monthly in repayments. However, if you were to apply for a personal loan of RM100,000, you would need to pay RM1,558.62 monthly (7 years tenure, 8% interest rate per annum).
- If you’re in need of urgent cash, you can opt for a personal loan. On the other hand, refinancing your property can be a smart financial move to save you money, consolidate debt or overcome serious debts.
- For refinancing, the processes of the loan application, approval and disbursement will take approximately 2-3 months. Nowadays, personal loans can be processed and approved almost immediately, taking around 24 hours to 5 working days.
How Bluebricks Can Help You
Loan application processes can be lengthy and difficult to understand. As Malaysia’s prominent one-stop loan services provider, Bluebricks is here to help you with your application and ensure that you have a higher chance of approval.
Trusted Loan Consultant in Malaysia
As a professional loan agency company, Bluebricks has assisted numerous clients with all things loan-related. Backed with years of experience, we help you assess loan applications, analyse loan agreements, and review your financial status to ensure a seamless loan flow and enhance your chances of getting your loan approved.
Furthermore, our comprehensive services require zero upfront fees and have no hidden charges. Our professional team of consultants is always ready and passionate about helping you make the right financial decision.
Loan Rejected Services
Your loan application just got rejected? Fret not! At Bluebricks, we strive to raise awareness and provide a greater understanding of the reasons affecting your loan application. This includes information on alternative solutions and advice to improve your eligibility for future financing.
With our refinance housing loan rejected services, we can help you with your refinancing loan applications to save your precious time and money.
Home Equity Loan vs Personal Loan Malaysia – FAQ
Here, we answer some common queries about home equity loans and personal loans in Malaysia so you can resolve your problems with ease.
1. What are the disadvantages of a home equity loan?
A major disadvantage would be that foreclosure is possible since your home secures the loan. There is also a high chance of bankruptcy if you take out a home equity loan without proper planning. Some other disadvantages include:
- You must borrow a lump sum
- You must have a good credit score
- You can sink deeper into debt if you get a loan larger than your home’s net worth
2. How much equity is in my house?
Simply subtract the amount you owe on all loans secured by your home from its appraised value to determine how much equity you have in your home. This also comprises your primary mortgage and any outstanding home equity loans.
3. Can an unemployed person get a personal loan in Malaysia?
The answer is yes. However, the applicant will need to prove that he/she has been earning some type of income or has income-earning assets. For example, the applicant may be self-employed or receive a regular deposit from other sources. This process is crucial to ensure that the applicant is able to repay the loan.