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If your credit is not quite up to a lender’s preferred level to get favorable interest rates and terms on your own, you might consider a joint personal loan. With this type of loan, you would have a co-borrower, an additional borrower who is obligated to repay the debt alongside you, the primary borrower. A co-borrower who has solid credit, income, and other financial credentials can help you qualify for a personal loan.

Here are key things to know about using a co-borrower on a personal loan.

What Are Joint Personal Loans?

Joint personal loans are loans that take into account multiple borrowers’ creditworthiness in the approval process. There are typically two borrowers on this type of loan — a primary and a secondary borrower — to establish joint personal loan eligibility.

Being a co-borrower on a loan comes with different rights and responsibilities than being a cosigner on a loan.

•   Co-borrowers, along with the primary borrower, have equal ownership of loan funds or what is purchased with the loan funds and are equally responsible for repayment of the loan over the life of the loan.

•   Cosigners have no ownership of the loan funds or what they’re used to purchase, and they are responsible for repayment only if the primary borrower fails to make payments.

How to Use Joint Personal Loans

If you don’t feel confident about qualifying for a loan, or have concerns about a potentially higher interest rate due to your overall creditworthiness or other reasons, finding a reliable co-borrower might help improve your chances of approval, along with the interest rate and terms you’re offered.

Couples can use a joint personal loan for a wide variety of purposes, including consolidating high-interest debts, paying for a large expense or event (like a wedding), or funding a remodeling project.

Recommended: Using Collateral on a Personal Loan

Why Do People Use Joint Personal Loans?

One common reason why someone might consider a joint personal loan is that they cannot qualify for a loan on their own, or they would like to snag a lower interest rate or qualify for a larger loan amount than they could on their own.

Some reasons people may seek a co-borrower are:

•   They don’t have a long credit history.

•   They’ve just entered the workforce.

•   They’re in the process of rebuilding their credit.

•   They are seeking a larger loan than they could on their own.

How Much Can You Save With Joint Personal Loans?

Having two borrowers on one personal loan may help you to qualify for a more favorable interest rate than if just one person’s income and credit are considered. Different lenders will have different qualification requirements, though, so it’s a good idea to compare lenders.

Using a joint personal loan for debt consolidation can be one way to lower the amount of interest paid on outstanding debt. Again, how much savings is accomplished depends on multiple factors, such as the interest rate offered and how long it takes to pay down the debt.

Factors That Affect Joint Loan Approval

Here are some important points about applying for a loan with a co-borrower and understanding what impacts your odds for approval.

Combined Income and Debt Obligations

When your application for a joint personal loan is reviewed, the lender will look at your combined income and debt obligations. Perhaps the primary borrower has a relatively low income and high debt load. By adding a co-borrower who has a strong salary (say, a spouse’s salary in the six figures) and minimal debt, the odds for loan approval could be enhanced.

Say that the primary applicant has a debt-to-income ratio, or DTI, of 48%, which is above the 36% many lenders prefer. If a co-borrower has a DTI of 22%, the couple’s DTI as a whole is 35%, bringing it to a level that may gain approval.

Credit History of Both Applicants

Similarly, lenders will take into account both applicants’ creditworthiness. Perhaps the primary borrower has what’s known as a thin file, meaning they don’t have a very deep credit history, or has a fair credit score. If their co-borrower has a credit score in a higher range (very good or exceptional), that could convince a lender to approve the loan and potentially at a lower rate and with more favorable terms. The co-borrower could help assure the lender of the duo’s creditworthiness.

What Credit Score Is Required for a Joint Personal Loan?

There is no definite answer to this question, but, in general, applicants with higher credit scores qualify for loans with lower average personal loan interest rates. And, vice versa, applicants with lower credit scores generally qualify for loans with higher interest rates.

Lenders tend to be risk-averse and prefer to lend money to people who they believe will repay it in full and on time. An applicant’s credit report — a summary of how responsible they are with credit that has been extended to them in the past — and credit score are tools lenders use to assess risk.

Before applying for a joint personal loan, it’s a good idea to review your credit report. If there are errors or discrepancies, you can file a dispute with the credit reporting agency. If you have poor credit or a limited credit history, you might consider taking some time to improve your credit profile before applying for a loan. Lenders will look at both applicants’ credit reports during the joint personal loan approval process, so it’s worth it for your credit to be in good shape.

Recommended: What Credit Score Do You Need for a Personal Loan?

Individual vs Joint Loan Applications

The basic process of applying for a loan is the same, no matter the number of applicants. Lenders will typically request the same information on either an individual or a joint loan application: proof of identity and address and verification of employment and income, in addition to any lender-specific information. For an individual loan application, there is just one person’s information to verify. Joint loan applications require information for each applicant.

Cosigned Loan vs Joint Personal Loan: The Advantages

Arguably, the primary borrower on either a cosigned loan or a joint personal loan has a bigger advantage than the cosigner or co-borrower. Depending on one’s perspective, however, all parties involved can reap benefits from these partnerships.

The Advantages of Choosing a Cosigned Loan

The advantage lies almost exclusively with the primary borrower on a cosigned loan. If they default, the cosigner is responsible for repaying the loan, although the primary borrower’s credit will likely be negatively affected. Ownership of the loan funds or what they purchased with the money is solely the primary borrower’s.

A personal loan cosigner’s main advantage may be in the form of a benevolent feeling from helping a close friend or family member.

The Advantages of Choosing a Joint Personal Loan

The main advantages of a joint loan are two-fold. There is equal ownership of the loan funds or the property purchased with those funds. Choosing a joint loan also means you may be able to present a more positive financial profile when applying than you could alone, signaling to lenders that it’s more likely the monthly loan payments will be made. This could pay off with a lower interest rate and more favorable terms.

Because joint loans give both co-borrowers equal rights, they are well-suited for people who already have joint finances or own assets together.

Cosigned Loan vs Joint Personal Loan: The Disadvantages

Both cosigned and joint loans include an additional borrower. However, a co-borrower taking out a joint loan has different rights and responsibilities than a cosigner, which can be risky.

The Disadvantages of Choosing a Cosigned Loan

The disadvantages of a cosigned loan lie mostly with the cosigner, not the primary borrower. The cosigner does not have any ownership rights to the loan funds or anything purchased with the loan funds. They are, however, responsible for repayment of the loan if the primary borrower fails to make payments.

The cosigner’s credit can be negatively affected if the primary borrower defaults on the loan, and their future borrowing power could be affected if a lender decides extending more credit would be too risky.

The Disadvantages of Choosing a Joint Personal Loan

People who already share financial responsibilities — married couples or parents and children, for example — may be the ones who consider joint personal loans, so there is typically some familiarity present.

That trust matters because co-borrowers have equal ownership rights to the loan funds or what the loan funds purchased. And it’s also important to have confidence in a co-borrower’s ability to repay the loan because each borrower is equally responsible for repayment over the entire life of the loan.

What’s the Better Loan Option?

If you’re seeking a loan with a spouse or relative and one of you has the strong credit history needed to get a favorable interest rate and terms, then a joint loan as co-borrowers may be right for you.

However, if you’d rather have a loan in your name with a little added security, then having a cosigner may make more sense.

No matter which situation you find yourself in, it’s important to weigh all of the options and do the necessary research that will allow you to arrive at the best joint personal loan option for you. (You might also consider personal loan alternatives as part of your research.)

After all, taking out a loan and repaying it responsibly has the power to put someone on a path to a more secure financial future, but it can also come with risks for each party.

Recommended: Exploring the Pros & Cons of Personal Loans

Where Do You Find a Joint Personal Loan?

It’s not uncommon for lenders to offer joint personal loans, but some research is necessary to find the right lender for your unique financial situation.

Looking at lenders of joint personal loans online is a good first step. Prequalifying to check joint personal loan eligibility is a fairly quick and easy process.

If you’re already an established customer at a local bank or credit union, you may also want to look at loan options there.

Tips for Applying for a Joint Personal Loan

If you decide to pursue a joint personal loan, consider these points to make the process easier.

Communicate Financial Responsibilities Clearly

As you apply for a joint personal loan, it’s wise to make sure you both agree on the details, such as the loan amount, the monthly payment you can afford, and who will pay it (will you split it 50/50?), and when. Develop a contingency plan if you struggle to make a payment.

Compare Lenders and Loan Terms Together

It’s also important to make sure the two of you are aligned on reviewing and deciding upon your loan. It’s wise to consider at least a few loan offers to see what rates and terms are available. For instance, a shorter loan term can mean higher monthly payments but less interest paid over the life of the loan. That might be preferable, if you can afford it, versus a longer term with a lower monthly payment, because that winds up often costing more in total.

Also make sure you both understand the consequences of late or missed payments before embarking on the loan together.

The Takeaway

Co-borrowers may help a primary borrower secure a personal loan by presenting a more positive financial profile and securing more favorable rates. However, these joint loans also require a great deal of forethought since both borrowers have access to the funds and responsibility for repaying the debt.

Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. See your rate in minutes.

FAQ

Can you apply for joint personal loans?

As long as the lender allows co-borrowers, you can apply for a joint personal loan.

What is the maximum amount of people for a joint personal loan?

Typically, a joint personal loan has two co-borrowers, but the maximum number of co-borrowers is up to the individual lender. Some allow for more than two borrowers.

Do joint personal loans get approved faster?

It’s likely to take more time for a joint personal loan to be approved than an individual loan because the lender will check the credit of each applicant.

Does a joint loan affect both credit scores?

Yes, a joint loan affects both borrowers’ credit scores. If loan payments are made on time, the borrowers could see a positive impact on their credit. If, however, payments are late or missed entirely, that can negatively impact each of the borrowers’ credit.

Can one person be removed from a joint personal loan?

Removing one person from a joint personal loan is dependent on the lender’s specific guidelines. It can be a complicated process that may involve refinancing the loan into a new individual loan, provided the solo borrower qualifies.

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

SOPL-Q425-057

If your home isn’t connected to a local sewer system, a septic tank is a must. But setting up a new septic system or replacing an old one can be a pricey endeavor. A new system, as of 2025, can typically cost between $3,634 and $12,512, with an average of $8,035, according to the home improvement site Angi.

Fortunately, there are a few different payment options available to help homeowners cover the costs of installing this essential piece of equipment.

In this guide, you’ll learn the various sources you might choose to fund your septic system project, and some of the pros and cons of each.

Septic System Costs

Most homeowners in the U.S. pay from $3,634 to $12,512 for a septic system installation, according to the home improvement site Angi. The average cost comes out to about $8,035. But prices can vary significantly depending on the size and type of tank you choose, the materials used, labor, and other factors — and costs could go over $20,000.

If you’re a die-hard DIYer who’s considering tackling this project with the help of some YouTube videos, you may want to think again. This is a big and dirty job that’s probably best left to professionals with the experience and machinery to get it done right. Here, take a look at some ways you can pay for the work and stay clear of the mess and stress.

Recommended: Personal Loan Interest Rates

What Factors Influence Septic System Pricing?

How much a new septic system costs will depend on several factors. Among them are:

•   How large and complex the septic system is

•   The site conditions, which can include everything from whether it’s steeply sloping to what type of soil needs to be dug up

•   Local permit guidelines and other regulations

•   What type of materials and tank you opt for

•   The cost of labor which can vary considerably with the cost of living in your area

As with other home improvement projects, it’s wise to comparison-shop and get multiple bids before starting a septic system replacement project.

Personal Loans for Septic System Financing

If you need to finance your project in a hurry (and with a septic system repair, that’s often the case), you may want to consider a personal loan.

With personal loans, it’s possible you could receive your money on the same day you apply or within a few business days. You also may have some flexibility in when the funds arrive and how long you have to pay back the money.

Personal loan repayment terms typically range from two to seven years, but they vary by lender. The amount you can borrow and the interest rate you’ll pay with home improvement loans are generally based on a few different factors, including your credit score. Typically, the better your credit, the lower the interest rate.

Generally speaking, qualifying borrowers with a strong credit history and high income may be able to secure a loan of up to $100,000 without having to provide some type of collateral. This type of home improvement loan usually has a fixed interest rate, so you can know exactly what your monthly payments will be.

Home Equity Loans and HELOCs

Another potential way to finance a septic system project is to tap your home equity and apply for a home equity loan or home equity line of credit (HELOC).

If you qualify for a home equity loan for your septic system, you’ll receive a lump-sum amount that you’ll repay in equal monthly installments, much like a personal loan.

A home equity line of credit (HELOC), on the other hand, works more like a credit card. The interest rate usually isn’t fixed with a HELOC, and neither is the payment amount. As you repay the money you’ve borrowed, you can use it again — up to a predetermined limit.

Because both home equity loans and HELOCs are secured with your home as collateral (which means the lender can foreclose if you fail to make your payments), the interest rates are generally lower than with unsecured personal loans. But it’s worth noting that you typically have to have at least 15% to 20% equity in your home to qualify, it can take longer to get your money, and you can expect to pay closing costs with this type of financing.

Credit Score Considerations for Septic System Loans

If you’re planning on getting a loan to finance a new septic system, your credit score will likely come into play in a few important ways.

•   Your credit score and credit report will impact the kind of loan you qualify for. Those with higher scores and strong reports will usually be approved for lower interest rates and higher loan amounts, and the opposite is true as well.

•   More specifically, many lenders require a good to excellent credit score (say, 660 or higher) in order for an applicant to be approved for a loan at a favorable rate. Loans are often available to those with lower scores (even borrowers with bad credit), but they will probably involve higher interest rates.

•   When you apply for a loan to fund a new septic system, the lender will typically require a hard credit pull to gain insight into your creditworthiness. This usually lowers your credit score by several points for a short period of time.

•   Once you have a loan for your new septic system, on-time payments should positively impact your credit score. Late payment or missing payments entirely, however, can lower your score.

Government Programs and Grants

If you meet certain criteria, you may be able to get help with funding through federal or state assistance programs. Here are a few options you may want to research:

•   The Environmental Protection Agency (EPA) Clean Water State Revolving Fund provides grants to all 50 states and Puerto Rico so that qualifying residents can receive low-interest loans to install, upgrade, or maintain their septic systems.

•   The U.S. Department of Agriculture (USDA) offers both loans and grants that can benefit low-income homeowners who need help with their septic system costs.

•   An FHA 203(k) loan combines a mortgage and funding for repairs, which may include septic system replacement.

•   The Department of Housing and Urban Development (HUD) provides community block grants to help eligible homeowners repair, install, or improve their residential septic system.

•   Some states also offer tax credits or deductions to residents who repair or replace a septic system. (You may want to check with your state government or local tax professional first to see what’s available and if you qualify.)

Contractor Financing and Payment Plans

It’s possible the septic tank company you’re considering has teamed up with a lender in order to offer its own financing plan to potential customers.

The salesperson or contractor will likely take you through each step of how the company’s septic tank financing works and may even offer a financial incentive if you sign up. Just remember that a contractor isn’t obligated to find you the best payment solution when it comes to how to pay for septic repair. So it’s important to review and understand the terms of any offer you receive, and to compare the contractor’s offer with other options available.

Recommended: How Much Does a Home Inspection Cost?

Comparing Septic System Financing Options

Hopefully, you’ll have time to do some comparison shopping as you consider the various financing methods for your septic system project. Here are some things to keep in mind as you do your research:

•   What monthly payment works for your budget? A longer loan term generally means lower monthly payments. Keep your budget in mind as you choose how much time you’ll need to pay back your septic tank installation financing.

•   How’s your credit? Good credit can often get you a better interest rate and other loan terms. If you aren’t sure where your credit stands, you may want to check out your latest credit report and/or credit score and dispute any errors you see.

•   What’s in the contract? Understanding the terms you’re being offered for a septic tank loan can keep you from running into trouble down the road. For example, if a contractor or credit card company offers you a low introductory interest rate, it’s important to ensure you’ll have enough time to pay off your purchase before the interest rate goes up.

•   Are there fees? Remember, fees can add to the overall cost of your loan. Some lenders may charge origination, application, and other loan fees. And you can expect to pay for a home appraisal and other closing costs if you get a home equity loan or HELOC.

•   How fast can you get the money? If you don’t have enough cash stashed away for your project, applying for a personal loan may be the quickest way to finance the work. Some personal loan lenders can get you your money on the same day you’re approved. Contractor financing also may offer a convenient and fast approval process.

Tips for Choosing the Right Financing Option

Deciding on the right financing option for your septic system replacement or repair will depend upon your unique situation. A few points to consider:

•   If you are in a rush to get your system back up and running (which is often the case), a personal loan can be a good avenue to pursue. Some lenders even offer same-day financing options. Note that your credit score will come into play, with higher scores typically contributing to lower interest rates.

•   If you have built up home equity, you might investigate a home equity loan or line of credit. These can take longer to secure and they use your home as collateral (meaning you risk foreclosure if you default), but they can offer favorable interest rates.

•   If you qualify, you may be able to secure government-backed loans and grants to pay for your septic system work. Diving into the requirements and documentation needed is a key step here.

•   Contractor payment plans may work well for some homeowners; be sure to review the terms and conditions carefully and compare them to other options.

•   Another option is to use your emergency fund to take advantage of a no-interest way to finance the work needed.

Understanding Total Loan Cost

As you look into the options available for funding your septic system work, remember to consider the total cost of the loan. That includes:

•   The principal, or the amount you are borrowing

•   The interest charged over the life of the loan

•   The fees that are often assessed, such as origination fees, which can be 1% to 10% of the principal amount

Understanding these factors will help you determine the full cost of the loan over the term you select and how much money you may need upfront. Equipped with this intel, you can determine which loan option best suits your needs.

Evaluating Repayment Flexibility

Sometimes, as you repay a loan, life happens and finances get tight. In that case, you may need flexibility to repay your loan. You may want to check the fine print before signing up for a lona. Features that can help in challenging times include grace periods, which are a buffer between when the payment is due and late fees kick in. Also, a loan may offer deferment and forbearance options, allowing you to pause or reduce payments in times of financial need.

On the other hand, you may also want to look into whether a loan offer has prepayment penalties. These fees can be applied if you pay off a loan before the term expires. The reason: The lender is losing out on the interest payments they were expecting to collect over the life of the loan. Prepayment fees can help compensate them for that.

Lastly, keep in mind that other features impact your repayment. A longer term can lower monthly costs but increase the amount of interest you pay over the life of the loan. Also, whether you opt for a fixed or variable rate loan will influence your monthly payment amounts, meaning whether they are stable or vary with the market.

The Takeaway

Replacing your septic system can be expensive, currently averaging more than $8,000. To fund this project, you might look into tapping your home equity via a home equity loan or line of credit, wherein you use your home as collateral. Or perhaps there’s a contractor financing plan that suits your needs. A personal loan, sometimes called a home improvement loan, can be a good option for many people, especially when funding is needed quickly; no collateral is typically needed. You may also be able to cut some of your costs if you can qualify for a government-funded grant or low-interest loan.

Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. See your rate in minutes.

FAQ

Are there tax deductions for septic system installation or repair?

A new septic system doesn’t qualify for any of the tax credits the Internal Revenue Service, or IRS, currently allows for home improvements. But some states offer tax credits or deductions to homeowners who replace or repair a septic system. A tax professional in your area can help you check for potential tax savings.

Can I finance both installation and ongoing maintenance of my septic system?

It’s a good idea to make septic tank maintenance costs a part of your household budget, but those expenses likely won’t be included in the amount you borrow to pay for a new system.

Are there special financing options for rural homeowners?

Yes. USDA loan programs can benefit rural homeowners who need to repair or replace a septic system.

What credit score do I need to qualify for septic system financing?

There is no one single credit score needed to qualify for septic system financing. However, it’s important to know that higher credit scores typically lead to approval for more favorable loan interest rates and terms, while people with bad credit are usually assessed higher rates and, say, qualified for lower loan amounts.

How long does it take to get approved for a septic loan?

How long it takes to get approved for a septic system loan will depend on the kind of financing you seek. If you are applying for a home equity loan or line of credit, that can take up to 6 weeks, depending on the lender and your specific circumstances. A personal loan can be significantly faster, with some lenders offering same-day funding or disbursement in just a few days.

Photo credit: iStock/Kwangmoozaa

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

SOPL-Q425-054

If you’re thinking about tapping the equity in your home, you’re looking at either a home equity loan or a home equity line of credit, better known as a HELOC. Both may allow you to borrow a large sum at a relatively low interest rate and with lower fees than a mortgage refinance.

Either a home equity loan or a HELOC is a second mortgage, so you’re literally betting the house: Your home can be foreclosed on if you cannot make payments. But for homeowners who have a secure income, good credit, and a substantial amount of equity, either one can be an excellent way to fund big expenses like renovations and debt consolidation.

When you’re considering a HELOC vs. a home equity loan side by side, there are differences that mean one type of loan may make more sense for you than the other. Let’s take a deep dive into the two to help you decide.

What’s the Difference Between a Home Equity Line of Credit (HELOC) and Home Equity Loan?

Both HELOCs and home equity loans let you use your home equity as collateral, but they’re not exactly the same. The main differences between the two are how the money is disbursed, how it’s repaid, and how the interest rate works. Let’s take a closer look.

What Is a Home Equity Line of Credit?

A HELOC is a revolving line of credit. You can take out money as you need it, up to your approved limit, during the draw period, which is typically 10 years. You may be able to make interest-only payments on the amount you withdraw during that time if you’re not ready to start paying back the funds you borrowed.

After the draw period comes the repayment period, which is usually 20 years. During this period, you must repay any principal balance with interest.
Most HELOCs have a variable interest rate. Some have a low introductory rate, and some require minimum withdrawal amounts.

What Is a Home Equity Loan?

A home equity loan is another type of second mortgage that uses your home as collateral. In this case, however, the funds are disbursed to you all at once, and repayment (with interest) starts immediately. It is usually a fixed-rate loan of five to 30 years, and monthly payments remain the same until the loan is paid off.

Key Differences

How Each Option Uses Home Equity as Collateral

Both types of loan rely on the equity in your house to secure the loan. This means that if you don’t repay your debt, the lender can take your home as payment. Because you repay these loans differently, when this becomes an issue may also be different.

With a home equity loan, you begin repaying the loan in set monthly payments immediately. You know what to expect, but if your financial situation changes and you can’t make your payments, your house can be at risk during any time in the loan term.

With a HELOC, you usually pay for only what you borrow (and interest) during the draw period. During the repayment period, when you pay back principal and interest for anything you borrow, you may be less able to manage payments, especially since they can vary in amount.

Comparing HELOCs and Home Equity Loans

Homeowners usually will need to have 15% to 20% equity in their home — the home’s market value minus what is owed on any mortgage — to apply for a home equity line of credit or home equity loan.

If you’ve been diligently paying off your home loan and you meet this threshold, then how much home equity can you tap? Many lenders will require your combined loan-to-value ratio — combined loan balance / appraised home value — to be 90% or less, although some will allow you to borrow 100% of your home’s value.

Here’s what to look at when comparing a HELOC with a home equity loan.

Interest Rate

The interest rate for a home equity loan is typically fixed, while the interest rate for a HELOC is usually variable.

HELOC rates tend to be a little higher than home equity loan rates (but keep in mind that you pay interest only on what you borrow from the credit line). Some lenders offer a low HELOC teaser rate for six months to a year before converting to a variable rate.

Keep in mind that Federal Reserve decisions affect the rates for both products. The prime rate, the rate given to low-risk borrowers for prime loans, is based on the federal funds rate set by the Fed.

Even when home equity loan rates rise, though, the rate for these secured loans will be lower than those of almost all unsecured personal loans and credit cards.

Recommended: What to Learn From Historical Mortgage Rate Fluctuations

Costs

Closing costs are essentially the same for a HELOC and a home equity loan — 2% to 5% of the total loan amount — but many lenders offer to reduce or waive them. Lenders may have already baked their costs into your rate quote — but that doesn’t mean it’s a better deal.

You’ll want to shop around with multiple lenders for the best deal, comparing rates, upfront costs, closing costs, and fees. Bear in mind that advertised rates are often reserved for well-qualified borrowers, so read the fine print.

Requirements

To see if you qualify for a HELOC or home equity loan, lenders will look at your employment and credit history, income, and the appraised value of your home. In other words, you must:

•   Have enough equity in your home

•   Have enough income to cover the monthly payment on the home equity loan

•   Have a good credit score (typically 620 or over, though some lenders may require a higher score)

•   Have a debt-to-income ratio of 45% or lower

Repayment

When it comes to repayment, HELOCs and home equity loans are very different.

With a home equity loan, the entire loan amount is deposited into your account at once. This also means you’ll start paying on the loan immediately. You can use a mortgage repayment calculator to see what your monthly payment might be, depending on how much you borrow and your interest rate.

With a HELOC, you use funds as you need them, up to the limit, during the draw period. Your payment may be just the interest charge for the amount borrowed. (A HELOC interest-only calculator can show you what your payments might be during this time.) However, the revolving credit line means you can withdraw money, repay it, and repeat before the repayment period, when the draw period ends and principal and interest payments begin.

Money Disbursement

Funds for a home equity loan are disbursed immediately. Sums from a HELOC are withdrawn as needed.

Payments

Payments on a home equity loan begin immediately. Payments on a HELOC aren’t required until you start borrowing money from your credit line.

Flexibility and Access to Funds Over Time

A home equity loan allows you immediate access to the whole loan immediately. However, your payments also start immediately and are typically at a fixed rate, meaning they will remain stable over time until you’ve paid off the loan.

By contrast, with a HELOC, you have access to your line of credit maximum immediately, but you don’t have to withdraw funds until you need them. Typically, you may be able to pay back only the interest on what you’ve drawn out until the end of the draw period. Once the repayment period starts, however, you will not be able to draw funds, and you will need to make payments on a regular schedule.

Recommended: Turn Your Home Equity Into Cash

HELOC vs. Home Equity Loan: Pros and Cons

HELOC Pros and Cons

Pros:

•   Access up to 90% of your home equity, or sometimes more

•   Flexible use

•   Only borrow what you need

•   Lower interest rate than most unsecured loans or credit cards

•   Some have low introductory APR offers

•   Loan interest may be tax deductible if the borrowed money was used to buy, build, or substantially improve your primary home; consult a tax advisor for more information.

Cons:

•   May have a slightly higher interest rate than a home equity loan

•   Variable interest rate means your rate and monthly payment can change throughout the repayment period

•   Home is at risk of foreclosure if you’re unable to make payments

•   The repayment period could bring sticker shock

•   Paying off a loan balance early could trigger a prepayment penalty, and closing a credit line within a predetermined period — usually three years — could negate the waiving of closing costs

•   In a small number of cases, a balloon payment could be required at the end of the draw period

•   May include annual or inactivity fees

Home Equity Loan Pros and Cons

Pros:

•   Access up to 85% of your home equity and sometimes more

•   Funds disbursed at once

•   Fixed interest rate

•   Predictable monthly payments

•   Lower interest rate than unsecured loans

•   Loan interest may be tax deductible if the borrowed money was used to buy, build, or substantially improve your primary home; consult a tax advisor for more information.

Cons:

•   Home is at risk of foreclosure if you’re unable to make payments

•   No flexibility in the amount of money you get

•   Limited to fixed installment payments

Which Is Better, HELOC or Home Equity Loan?

The better loan is the one that fits your life circumstances. A home equity line or loan can be used to buy a second home or investment property, pay medical bills, pay off higher-interest credit card debt, fund home improvements, and pay for other big-ticket items. But differences in your situation can make one more appealing than the other.

When a HELOC Is a Better Fit

HELOCs are more flexible than home equity loans. If you’re unsure how much money you need, don’t need to borrow immediately, or want flexible repayment options, you might want to think about applying for a HELOC over a home equity loan.

When a Home Equity Loan Is a Better Fit

A home equity loan can be a good fit for people who know how much they need to borrow and want the regularity of an installment loan with a fixed interest rate and fixed payments.

Risks to Consider with Both HELOCs and Home Equity Loans

Since HELOCs and home loans both use your home itself as collateral, you are potentially risking your house if you can’t make payments. If you default, your lender can foreclose on your house.

The Takeaway

Your decision on a home equity loan vs. a HELOC can depend on what you’re planning to use the money for. If you need a certain amount of money all at once, a home equity loan may be a good fit. If you want the flexibility to take out money as you need it, a HELOC may work better.

SoFi now partners with Spring EQ to offer flexible HELOCs. Our HELOC options allow you to access up to 90% of your home’s value, or $500,000, at competitively lower rates. And the application process is quick and convenient.

FAQ

Which is faster, a HELOC or home equity loan?

When it comes to the time it takes to get a home equity loan vs. a HELOC, they’re tied, typically. It could take two to six weeks to get a HELOC or home equity loan.

HELOC or home equity loan for an investment property?

Investors may like the flexibility of a HELOC. A lump-sum home equity loan, however, could also be advantageous for renovating or buying properties.

HELOC or home equity loan for a home remodel?

If you know exactly how much you’re going to be spending on a home remodel and you’d like predictable payments, you can use a home equity loan. If you want more flexibility or are less certain about your costs, you might prefer a HELOC.

Can you have both a HELOC and home equity loan?

It is rare to have both a HELOC and a home equity loan. One would be a second mortgage and the other would be a third mortgage (assuming you are still paying off your first mortgage). Few banks are willing to lend money on a third mortgage, and for any that do, the interest rate would be high.

What happens if you default on a home equity loan or HELOC?

If you can’t or don’t make the required payments on your home equity loan or HELOC, you risk having your lender foreclose on your home. Since your house serves as collateral for both, if you default, you may lose it.

Photo credit: iStock/Hispanolistic

^²SoFi Bank, N.A. NMLS #696891 (Member FDIC), offers loans directly or we may assist you in obtaining a loan from SpringEQ, a state licensed lender, NMLS #1464945.
All loan terms, fees, and rates may vary based upon your individual financial and personal circumstances and state.
You should consider and discuss with your loan officer whether a Cash Out Refinance, Home Equity Loan or a Home Equity Line of Credit is appropriate. Please note that the SoFi member discount does not apply to Home Equity Loans or Lines of Credit not originated by SoFi Bank. Terms and conditions will apply. Before you apply, please note that not all products are offered in all states, and all loans are subject to eligibility restrictions and limitations, including requirements related to loan applicant’s credit, income, property, and a minimum loan amount. Lowest rates are reserved for the most creditworthy borrowers. Products, rates, benefits, terms, and conditions are subject to change without notice. Learn more at SoFi.com/eligibility-criteria. Information current as of 06/27/24.
In the event SoFi serves as broker to Spring EQ for your loan, SoFi will be paid a fee.

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

SoFi Mortgages
Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility-criteria for more information.

SOHL-Q225-008

Many homeowners are flush with equity, and tapping it can be tempting. Some lenders will let you borrow as much as 100% of your home equity — the home’s current value minus the mortgage balance — for any purpose. Your house, though, will be on the line.

Here are things to know before applying for a home equity loan, a home equity line of credit (HELOC), or a cash-out refinance.

What’s the Most You Can Borrow With a Home Equity Loan?

To determine how much you can borrow with a home equity loan, lenders will calculate the combined loan-to-value ratio: your mortgage balance plus the amount you’d like to borrow compared with the appraised value of your home.

Most lenders will require your combined loan-to-value ratio (CLTV) to be 90% or less for a home equity loan or HELOC (although some will allow you to borrow 100% of your home’s value).

combined loan balance ÷ appraised home value = CLTV

Let’s say you have a mortgage balance of $150,000 and you want to borrow $50,000 of home equity. Your combined loan balance would be $200,000. Your home appraises for $300,000. (An appraiser from the lending institution determines your property value.) The math would look like this:

$200,000 ÷ $300,000 = 0.666

Your CLTV is 67%.

If a lender allowed you to borrow 90% of CLTV in this scenario, you would have a loan of $120,000:

($150,000 + $120,000) ÷ $300,000 = 0.900

But just because you might qualify for a loan or line of credit of this amount doesn’t mean it’s a good idea for your personal situation. Consider what the payments, which include interest, would look like and whether your financial situation is secure enough for you to afford them if you suffer a setback.

Three Ways to Tap Home Equity

You paid off a chunk of your mortgage or all of it, or your home value soared along with the market, but now a wedding, college, remodel, or something else has you wanting to put that home equity to use. Here are three ways to do that.

Remember that converting home equity to cash means you’ll be using your home as collateral.

Home Equity Loan

Home equity loans come in a lump sum. They are often useful for big one-time expenses like a new car or swimming pool and for borrowers who know how much they need and who want fixed payments.

Some lenders waive or reduce closing costs of 2% to 5%, but if you pay off and close the loan within a certain period of time — often three years — you may have to repay some of those costs.

HELOC

A HELOC may be helpful for long-term needs such as home renovations, college tuition, or medical bills.

Borrowers who want flexibility when dealing with, say, a home addition may favor a revolving line of credit over a lump-sum loan.

Again, some lenders waive the closing costs for a HELOC if you keep it open for a predetermined period.

Recommended: How Do Home Equity Lines of Credit Work?

Cash-Out Refinance

A cash-out refinance might be a good choice if you want to borrow more than you’d qualify for with a home equity loan or HELOC. A cash-out refi replaces your existing mortgage with a new mortgage for more than the previous balance. You receive the difference in cash.

Homeowners will often need to have 20% equity left in the home after refinancing. Some lenders will let them dip below that minimum but pay for private mortgage insurance on the new loan.

Some HELOC borrowers refinance before the draw period ends. In that case, the cash can be used to pay off the HELOC.

You can change the mortgage term and aim for a reduced interest rate with a cash-out refi. Closing costs will be required; it’s a new loan.

Recommended: Cash-Out Refinance vs HELOC

What’s the Difference Between a Home Equity Loan and a HELOC?

A home equity loan, also known as a second mortgage, comes in a lump sum with a repayment term of 10 to 30 years. It typically has a fixed interest rate.

A HELOC is a revolving line of credit that lets a homeowner borrow money as needed, up to the approved credit limit. The credit line has two periods:

•   The draw period, when you can use the line of credit. It’s often 10 years. Minimum monthly payments usually will be interest only on the amount withdrawn.

•   The repayment period, often 20 years, when principal and interest payments are due.

Most HELOCs have a variable interest rate but cap how much the rate can rise at one time and over the loan term. (Some lenders, though, offer fixed-rate HELOCs or allow the borrower to fix the rate on a balance partway through the loan.)

Some HELOCs require you to draw a minimum amount upfront. Some have a balloon payment at the end of the draw period, when the loan principal and interest are due. Ensure that you understand your HELOC’s terms, and when the draw period ends and the credit line is closed.

How Is a HELOC Calculated?

Qualified borrowers are often able to access as much as 90% of their equity with a HELOC.

Some HELOC lenders require that the homeowner retain at least 20% equity in the home, but a few are more generous.

Is Taking Out Home Equity Right for You?

If you’re aware of the risk, you’ve read all the fine print, and you forecast no job or income loss, tapping home equity can be extremely useful.

HELOCs usually have lower interest rates than home equity loans, but some people prefer the fixed rate and payments of the latter. HELOC rates tend to be a tad higher than mortgage rates, but you only have to pay interest on what you borrow during the draw period.

Most cash-out refinances result in a new 30-year fixed-rate mortgage.

Approval for a home equity product and the rate you’re offered will depend on your credit score, debt-to-income ratio, home equity, and home value.

Shopping around can yield the best offer.

Recommended: Home Improvement Cost Calculator

The Takeaway

How much equity can you borrow from your home? Homeowners who meet credit and income requirements are often able to tap up to 90% of equity and sometimes more with a home equity loan or HELOC. A cash-out refi is another way to make use of home equity.

SoFi now partners with Spring EQ to offer flexible HELOCs. Our HELOC options allow you to access up to 90% of your home’s value, or $500,000, at competitively lower rates. And the application process is quick and convenient.

FAQ

How can I increase my home equity?

Paying off your mortgage faster, refinancing to a shorter loan term, and making home improvements are some of the ways to boost home equity. In a competitive market, your home value may just naturally rise.

How quickly can I get cash from my home equity?

It depends on the product, but closing can take place in as little as two to four weeks.

SoFi Mortgages
Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility-criteria for more information.

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

SOHL-Q324-045

If you’re finding your student loan debt difficult to manage, one option for tackling it is to leverage your home equity. It’s possible to do this through the student loan cash-out refinance program offered by Fannie Mae or through a general cash-out refinance.

Either option would allow you to use the excess value of your home to pay off student loan debt directly. Plus, because you would be consolidating your student loan debt into your mortgage, you’d have to make just one payment each month. You might also secure a lower interest rate than you had on your student loans.

Still, there are major downsides to consider before paying off student loans with home equity. For one, the student loan debt won’t actually go away — you’ll still owe that money. Additionally, you could lose access to student loan benefits and protections. And, if you aren’t able to stay on top of monthly payments, your home is on the line.

Using a Student Loan Cash-Out Refinance to Pay Off Student Loans

With a cash-out refinance, you take out a new mortgage for an amount that exceeds what you currently owe. You then get the difference in cash, which you could then use to pay off your student loan debt.

One option for doing this is through Fannie Mae’s Student Loan Cash-out Refinance program, which is specifically designed to allow homeowners to use their home equity to pay off student loans. To qualify, borrowers must use the funds from the cash-out refinance to fully pay off at least one of their student loans. Additionally, it’s stipulated that this loan must belong to the individual who applied for the refinance.

For borrowers who don’t qualify for the Fannie Mae program, or who want to use their cash for costs other than student loan repayment, it’s also possible to get a general cash-out refinance through another lender.

Whether you go with Fannie Mae or another lender, there are typically certain requirements that a borrower must meet to qualify for a cash-out refinance. Generally, there are stipulations for credit score, debt-to-income ratio, and the amount of equity in the home after closing. As such, it’s helpful to determine before applying how much equity you have in your home.

Recommended: First-Time Homebuyer Guide

Should I Tap Into My Home Equity to Pay Off Student Loans?

Using the equity you’ve earned in your home to pay off your student loans may sound like an easy fix. But before you commit to refinancing, you’ll want to weigh the decision carefully. While it may make sense for some, a student loan cash-out refinance won’t work for everyone. Here are a few pros and cons to consider as you make your decision.

Benefits of Paying Off Student Loans with Home Equity

Like most financial decisions, paying off your student loans with the equity you’ve earned on your home is a multifaceted decision. Here are some of the ways you could find it beneficial:

•   You may be able to get a better rate. Securing a lower interest rate is potentially the most appealing reason to use the equity in your home to pay off student loans. As part of your decision-making process, consider reviewing mortgage options at a few different lenders. While reviewing rate quotes from each lender, do the math to determine if paying off student loans with home equity will truly reduce the amount of money you spend in interest. If there are any fees or prepayment penalties, make sure to factor those in. Keep in mind this isn’t the only way to get a better rate either — another option to explore is student loan refinancing.

•   You may get more time to pay off your loan. When making your decision, also take into account the length of the mortgage term. The standard repayment plan for student loans is a 10-year term, unless you have already consolidated them, in which case you could have a term of up to 25 years. With a mortgage, term lengths can be as long as 30 years. Just keep in mind that while repaying your debt over a longer time period could lower monthly payments, it may also mean you pay more in interest over the life of the loan.

•   You can streamline your payments. Another benefit is reducing the number of monthly payments you need to keep track of. Instead of paying your mortgage and each of your student loans, those bills will get consolidated into a single payment. Streamlining your payments could help you stay on top of your payments and make your finances a little bit easier to manage.

Recommended: Home Affordability Calculator

Downsides of Paying Off Student Loans with Home Equity

There are a few potential negatives that could impact your decision to pay off student loans with your home equity:

•   You risk foreclosure. Using your home equity to pay off your student loans could potentially put your home at risk. That’s because you’re combining your student loans and mortgage into one debt, now all tied to your home. That means if you run into any financial issues in the future and are unable to make payments, in severe cases, such as loan default, your home could be foreclosed on.

•   Your student debt won’t really disappear. When you use your home equity to pay off your student loans, you’ll still owe that debt. Only now, it’s part of your mortgage.

•   You’ll lose access to student loan benefits and protections. When you do a student loan cash-out refinance, you’ll no longer be eligible for borrower protections that are afforded to borrowers who have federal loans. These benefits include deferment or forbearance, as well as income-driven repayment plans. If you’re pursuing student loan forgiveness through one of the programs available to federal borrowers, such as Public Service Loan Forgiveness, consolidating your student loan debt with your mortgage would eliminate you from the program. As such, it may not make sense to use the equity in your home to pay off your student loans if you’re currently taking advantage of any of these options.

•   You could owe more than your home is worth. As you weigh your options, consider comparing the available equity in your home to the amount you owe in student loans. In some cases, you may owe more in student loan debt than you have available to use in home equity under the various loan guidelines. If you end up owing more than what your home is worth, that could make it tough to sell your home, as you’d need to add your own funds to repay your loan balance.

When It’s Time to Leverage Your Home Equity

Cashing in on your home equity isn’t as easy as withdrawing money from your checking account, but it’s also not as difficult as you might think. A good first step is to contact a mortgage lender, who will order an appraisal of your home and help you to get started on the paperwork.

This is also a good time to explore another way to leverage home equity to pay bills: a home equity line of credit (HELOC). When you take out a HELOC, you can borrow (and pay interest on) only as much as you need at a given time, up to a preapproved credit limit. A HELOC monthly payment calculator can be a useful tool as it will help you understand what monthly payments might look like if you follow this path. If you have a great rate on your existing mortgage and don’t want to refinance into a higher rate, a HELOC might be a good alternative.

It could also be a good idea to check your credit score. To secure a cash-out refinance, many lenders will likely require a credit score of 620 or higher. That being said, the minimum score required depends on many factors, such as credit, income, equity, and more. If you don’t meet the minimum FICO score requirement for your chosen program, you might want to try to improve your credit score before applying.

At the very least, you’ll likely need to gather necessary documents so you have them handy. Get together your latest tax filings, pay stubs, and bank statements. Lenders use those documents to evaluate whether you have the savings and cash flow to pay back a fatter mortgage, and they may ask for when you apply to refinance.

The Takeaway

When used responsibly, home equity can be a useful tool in helping to improve your overall financial situation — including using home equity to pay off student loans. While there could be upsides, such as streamlining payments and securing a better rate, it’s important to also weigh the drawbacks, like losing access to student loan protections and putting your home on the line. Depending on how much you owe on your student loans, a cash-out refi or a home equity line of credit (HELOC) might be a good way to settle some or all of your student loan debt and even consolidate multiple loans into one payment.

SoFi now partners with Spring EQ to offer flexible HELOCs. Our HELOC options allow you to access up to 90% of your home’s value, or $500,000, at competitively lower rates. And the application process is quick and convenient.

FAQ

Is it smart to use home equity to consolidate debt?

It can be. If you can obtain a lower interest rate on a home equity loan, home equity line of credit (HELOC), or even a cash-out refinance, it could make sense to consolidate debt this way. And if you have multiple types of debt (student loan debt, credit card debt, for example), it might simplify things to have one monthly payment. But it does mean you would lose access to student loan forgiveness and forbearance benefits, and securing debt with your home does involve risk.

Is it a good idea to take out a home equity loan to pay for college?

While you can pay for college with a home equity loan, it might be better to find a student loan for that expense because if you are unable to make payments on your home equity loan, your property could be at risk.

SoFi Mortgages
Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility-criteria for more information.

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

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