What type of loan uses your home’s equity as collateral?

A home equity loan is specifically designed to leverage the equity that you have built up in your home as collateral. This type of loan allows you to borrow against the value of your property, typically offering a lower interest rate compared to unsecured loans because the loan is secured by your home.

The process generally involves an assessment of your home’s market value in relation to the outstanding mortgage balance. Home equity loans are often used for significant expenses, such as home improvements, debt consolidation, or education costs, because they provide a substantial amount of capital based on the homeowner's equity.

In contrast, other options like personal loans do not use any asset as collateral, making them unsecured and often with higher interest rates. Payday loans are short-term, high-interest loans typically used for emergencies and have no connection to home equity. Lastly, credit card debt is also unsecured, relying on the individual's creditworthiness rather than collateral, leading to higher rates and potential financial risk.