If you are new to the world of borrowing, you may be lost in the potentially confusing and seemingly redundant loan types discussed by lenders. Here our intention is to help clarify the differences and similarities between three important types of loans: Home equity loans, HELOCs, and Title loans. There is significant overlap between the three types, but each has their own benefit and upside. Read on to learn more
I will start by describing home equity loans and their particular benefits. Home equity loans are an excellent way for homeowners to obtain financing. Due to the high quality collateral provided by real estate assets, banks can be very willing to provide this type of loan. Borrowers can come across some difficulty if they have little equity built in their home or if they live in a region with unstable real estate value. For most though, this is a very solid and simple way to borrow large amounts of money from the banks. The key benefit to this loan type is that both parties are often satisfied with the loan terms – the banks because their money can be easily recuperated in the case of default, and the borrower because the banks are often willing to provide low interest rates.
HELOC stands for Home Equity Line of Credit, so like a home equity loan the borrower’s home is used as collateral in case of default. As a result, banks are often willing to provide very large principles for this type of loan. The key difference between a HELOC and a home equity loan is in the terms. HELOCs are an open ended loan type and thus the principle can be borrowed repeatedly and then repaid gradually, much like a credit card. This is the key benefit of this loan type over home equity loans – it is money which can be borrowed again and again as it is needed. A home equity loan can only be borrowed once as it is a conventional loan.
A title loan is a method of financing for which the pink slip of a vehicle is used as collateral for the principal on the loan. The same upsides of HELOCs and home equity loans are also present in this type of loan – collateral mitigates the amount of risk the bank is taking by lending you money. Through a reduction in risk, interest rates are also reduced for borrowers. They key difference between title loans and the other two is that vehicles are not nearly as high quality of collateral as is real estate. The price of a vehicle depreciates quickly over time unlike a real estate which increases in value. Banks recognize this, and interest rates on title loans will reflect this discrepancy.
Here is a side-by-side comparison between Home Equity Loans, HELOCs and Title loans:
Home Equity Loan | HELOC | Title Loan | ||
|---|---|---|---|---|
| Pros | -Can borrow large sums of money -Low interest rates for borrowers -Limited risks for banks -Acceptance can be very easy | -Can borrow larger sums than title loans -Low interest rates for borrowers -Low risk for banks -Principle can be borrowed against again repeatedy | -Can borrow larger sums than without collateral -Lower interest rates than without collateral | |
| Cons | -Borrower's home will be repossessed in the event of default -Payments can be large given the high principle sums borrowed -Principle cannot be re-borrowed when repaid. | -Can borrow smaller sums than home equity loans -Higher interest rates than home equity loans -More difficult to obtain than home equity loans -Borrower's home will be repossessed in the event of default | -Higher interest rates than HELOCs or home equity loans -Money cannot be re-borrowed -Defaulting on loans will result in the borrower's vehicle being repossessed | |
