Debt Consolidation Loan vs Home Equity Loan

By Tom Burchnell
Debt Consolidation Loan Home Equity Loan

Wondering what the difference is between a debt consolidation and a home equity loan? Read on to determine which choice is best for you.

Facing the financial difficulty of paying off a high interest debt can feel as though there’s a constant weight on your shoulders. It’s more than understandable when people pursue relief options to reduce their debt burden.

Here are some of the distinct options you can choose from: debt consolidation vs. home equity loans. If you’re a homeowner, another avenue to explore is utilizing a home equity loan to pay off debt.

In essence, here’s what you need to know when comparing the two: debt consolidation loans are a possible route for all financially qualified borrowers. On the other hand, home equity loans are only available to homeowners.

So which is right for you? A debt consolidation loan or a home equity loan?

Different people may find some debt relief methods suit their situation much better than others. So, when considering debt consolidation loan vs. home equity loan options, it’s important to investigate both options—and any alternatives—thoroughly. Need a helping hand? Here’s your guide.

Debt Consolidation vs Home Equity Loans At a Glance

Both debt consolidation loans and home equity loans can be used for a common goal: paying off your current debts and replacing them with a new, single loan with a fixed interest rate, loan term, and monthly payment.

So, what’s the difference?

Debt Consolidation Loans

Debt consolidation loans typically consist of personal loans to pay off debt (e.g., credit card debt). Your debt transfers from multiple accounts that require their own payments each month to the consolidation loan. 

Home Equity Loans

Home equity loans leverage the value you have accrued in your home to receive cash now. Your home equity represents the amount you would receive if you sold your house, minus any remaining balance owed on your mortgage. 

A home equity loan allows you to access this value today rather than waiting until closing the sale of your home. Keep in mind that a home equity loan and a home equity line of credit (HELOC) are different. 

If you sign for a home equity loan, you will receive the agreed-upon funds—usually no more than 85% of your home equity—and can pay off your debt. The main benefit is that borrowers are, in essence, leveraging value they already own rather than taking on additional debt.

Keep in mind that, for both home equity loans and debt consolidation loans, you’ll need to continue making regular monthly payments on your debt. But while it won’t disappear, you could lower your costs over the lifetime of your loan.

When weighing debt consolidation vs home equity loan options, evaluating the advantages and disadvantages will help you determine if either is right for you. The most considerable differences between them are the risks and interest rates.

Pros and Cons of Debt Consolidation Loans

One major advantage of a debt consolidation loan is broad eligibility requirements. If you have a good credit score and regular income, you can potentially qualify for a debt consolidation loan even if you don’t have significant assets. However, it’s important to keep in mind that interest rates aren’t ideal and only smaller debt amounts may qualify

Pros of Debt Consolidation Loans

Besides their accessibility, debt consolidation loans carry several benefits:

  • Better interest rates – Compared to the interest that accrues on credit card debt, consolidation loans typically offer a lower interest rate or annual percentage rate for most borrowers. Reducing your interest rate will save money in the long run due to lower overall interest payments and allow you to pay down more of the owed balance (i.e., the principal) each month.
  • Unsecured loan – Personal loans used for debt consolidation are often unsecured, meaning borrowers do not offer collateral to be taken by the lender if you fall behind on your loan payment compared to a secured debt. With an unsecured debt consolidation loan there is no fear that you might lose some of your property. There are some unique debt consolidation options, like a debt consolidation refinance, where you can leverage a mortgage refinance to consolidate your debt.

Cons of Debt Consolidation Loans

While a quick look at the benefits of consolidation over multiple debts may make it seem like a perfect fix, disadvantages remain:

  • Better, but not great interest rates – Though the interest rates on personal loan or consumer debt options may be better than your credit cards, they may still be high enough to make repayment challenging. Lenders will set the fixed rate or annual percentage rate higher than if borrowers used collateral to secure the loan.

Pros and Cons of Home Equity Loans

In contrast to debt consolidation loans, using a home equity loan to pay off debt is only an option for homeowners. This allows interest rates to be lower but you may be risking your home as well as paying significant up-front costs. Nonetheless, you get to use a home equity loan for debt consolidation

Pros of Home Equity Loans

A home equity loan can offer lower interest rates than debt consolidation and leverages value you already own in your home. The benefits include:

  • Even lower interest rates – While a personal loan is used to consolidate debt often offer a better fixed interest rate than credit cards. Because this is a secured loan,  the collateral (i.e., your home equity) used to secure a home equity loan reduces your rates significantly. Lenders are more comfortable offering a better repayment term with a guarantee on their return.
  • You already own your home equity – In conventional home financing, you liquidate your equity upon closing the sale of your house, but you still own that value beforehand. Home equity loans allow you to leverage that value now instead of waiting for (or requiring) the sale of your house.

Cons of Home Equity Loan

The advantages of a home equity loan over debt consolidation do come with two serious risks, however:

  • You may risk losing your home – Your home equity acts as collateral for the lent funds should you fall behind in your payments during the repayment period. That means a failure to make payments could result in foreclosure.
  • Typically, home equity loans are limited to 85% – Lenders will not allow you to borrow against the full amount of your home equity.
  • Approval may be difficult – Loan applicants with the best chance of approval typically have credit scores above 700 and own home equity at least 15-20% of the property’s market value. If you’re trying to figure out how to consolidate debt with bad credit, this may not be your best option.
  • Significant upfront costs and drawn-out application processes – Receiving approval for a home equity loan is an extensive process that requires a thorough review of your personal finances and your property’s value. Lenders add loan fees to cover these checks and appraisals, which can diminish your home equity by a few thousand dollars right off the top.

Open Up New Possibilities with a Sale-Leaseback Solution

If the risks of debt consolidation and home equity loans concern you, rest assured that you’re not out of options. Consider a sale-leaseback program to suit your needs. Through a sale-leaseback, you sell your home and become a renter. This gives you the opportunity to use your equity to manage financial difficulties, help search for a new home, or acquire the funds for other ventures now. 

Ready to learn more about our innovative solutions? Get in touch with a financial advisor.

Key Takeaways

Wondering what the difference is between a debt consolidation and a home equity loan? However, there are distinct options you can choose from: debt consolidation vs. home equity loans. If you are still unsure of alternative options to securing your home equity loan or consolidating your debt, after reading this article, consult a financial advisor to discuss your options.


  1. FTC Consumer Information. Home Equity Loans and Credit Lines. 
  2. MoneyGeek. Guide to Home Equity Loans: Pros & Cons, Requirements & Limits. 
  3. NerdWallet. Home Equity to Consolidate Debt: Weigh the Pros and Cons.
Debt Management
Home Equity Loan
Tom Burchnell
Written by Tom Burchnell
Director of Product Marketing

This article is published for educational and informational purposes only. This article is not offered as advice and should not be relied on as such. This content is based on research and/or other relevant articles and contains trusted sources, but does not express the concerns of EasyKnock. Our goal at EasyKnock is to provide readers with up-to-date and objective resources on real estate and mortgage-related topics. Our content is written by experienced contributors in the finance and real-estate space and all articles undergo an in-depth review process. EasyKnock is not a debt collector, a collection agency, nor a credit counseling service company.