Is a bank loan better than equity release?

When looking to raise finance, you should consider all available options. Today, we will explore the advantages of taking a bank loan over equity release.

Bank loans can be more cost-effective than taking equity release if you have a short-term need for a modest amount of money. However, bank loans require monthly payments, and the amount you can borrow is based on how affordable the loan is. Equity release can be better if you want to borrow more money or avoid making mandatory monthly payments.

However, there are many different types of bank loans. How do they each compare to equity release?

In this guide, you will learn:

• Unsecured bank loan compared to equity release
• Secured loans compared to equity release
• Mortgages compared to equity release
• Credit cards compared to equity release
• Bridging loans compared to equity release
• Car finance compared to equity release

But before we explore each in detail, here's a quick summary of different finance options:

Unsecured loan	Often best when you need up to £30,000 and repayments are affordable over 5 years.
Fast - Funds from unsecured loans are usually in your bank account within one working day of your loan application being processed. Interest rates - You will likely find higher interest rates than other finance for unsecured loans.
Secured loan	Often best when you need more than £30,000 or want to borrow over more than five years.
Relatively fast - Funds from secured loans are usually in your bank account within a few weeks of your loan application being processed. Setup costs - You will likely find higher advice fees for secured loans and upfront valuation fees. The lender will also assess affordability and check your credit score.
Mortgages	Often best when you want to borrow larger sums of money over the long term with an affordable monthly payment.
Interest rates - You will likely find the lowest interest rates on long-term borrowing for mortgages. Affordability - The lender will assess affordability and check your credit score.
Credit cards	Often best when you have a short-term need for money or want protection when spending.
Introductory deals - You can often get interest-free purchase periods or make interest-free balance transfers from other cards. Credit limit - You will likely be able to borrow much less compared to secured finance options.
Bridging loans	Great for "briding-the-gap" for money needed now while you wait for other money to come in - often from a house sale.
Fast - You can expect a bridging loan to provide funds faster than equity release. Interest charges - As bridging finance is designed to run for a short period, you can expect interest charges to be between 0.5% and 2% per month.
Car finance	Often best when you want to purchase a car and you do not want to secure the finance on your home.
Flexible - You can easily tailor the car finance to meet your deposit and monthly payment needs. Interest rates - Used car finance interest rates are very similar to unsecured loan interest rates. You may find compelling deals on brand new cars, but they are usually worked into the purchase price of the vehicle.
Equity release	Often best for homeowners aged 55 and above who want access to either a lump-sum or regular money without the need to make any monthly payments.
No monthly payments required - As any payments are optional, there are no affordability assessments. If you have impaired credit, getting equity release is usually not a problem. Setup costs - You are required to have both financial and legal advice when taking equity release. Expect setup costs to be in excess of £1,500.

Let's now look at each type of bank loan in more detail, and see how it compares with equity reelase.

Unsecured bank loan compared to equity release

	Unsecured bank loan	Equity release
Speed	Typically 1 working day from successful application	approximately 8 weeks
Setup costs	None	> £1,500
Interest rate	Higher	Lower
Fixed-rate period	Duration of loan	Duration of loan
Loan sizes	Typically under £20,000	Minimum £10,000; maximum based on your property value
Monthly payments required	Yes	No
Affordability assessed	Yes	No

Getting an unsecured bank loan can be the quickest way for you to borrow money.

Many unsecured lenders will offer individual loans up to £20,000, but with equity release, you can borrow much more.

While equity release can take 8 weeks, you can expect to receive the money from an unsecured loan within 1 working day.

So, if you need access to quick money for home improvements, to consolidate other unsecured debt, or to finance a vehicle purchase, an unsecured loan could be the best option for you.

With equity release, you can expect to pay more than £1,500 to set up the plan, whereas with a personal loan, there are no setup fees.

Therefore, while you can expect a lower interest rate on equity release, if you only need a small amount of money, taking an unsecured loan is often more cost-effective as there are no setup charges.

The amount of money that an unsecured loan provider is willing to lend you will depend on your ability to repay each month.

However, if the monthly payments are unaffordable, or if you want to borrow more than £20,000, equity release could be a better option.

It's probably quickest to check with your bank to see if they can offer you a personal loan, how much they can provide you, the interest rate, and the monthly payment you will need to make.

You can generally check and apply with your online/mobile banking.

Once you have your unsecured loan quote, we can compare this to equity release.

Secured loans compared to equity release

	Secured bank loan	Equity release
Speed	approximately 3 weeks	approximately 8 weeks
Setup costs	Often up to 10% of the loan amount	> £1,500
Interest rate	Normally higher	Lower
Fixed-rate period	Various	Duration of loan
Loan sizes	Minimum £5,000; maximum based on your property value and affordability	Minimum £10,000; maximum based on your property value
Monthly payments required	Yes	No
Affordability assessed	Yes	No

Secured loans can be a good way for homeowners to borrow more money than they can achieve with unsecured loans or to access better interest rates.

As the loan is secured against your home, your property is at risk of repossession if you fail to keep up with payments.

With equity release, the charge is secured on your home in the same way. However, no mandatory monthly payments exist, so you can never fall into arrears.

Secured loans can be taken on top of your existing mortgage. However, with equity release you will need to repay your mortgage with the equity release too.

Let's look at an example:

Mortgages compared to equity release

	Mortgage bank loan	Equity release
Speed	approximately 4 weeks	approximately 8 weeks
Setup costs	Can be free but if you pay a fee you will often have a lower interest rate	> £1,500
Interest rate	Normally lower - depending on the fixed-rate period and your credit score	Normally higher - as the interest rate is fixed-for-life
Fixed-rate period	Various	Duration of loan
Loan sizes	Minimum £10,000; maximum based on your property value and affordability	Minimum £10,000; maximum based on your property value
Monthly payments required	Yes	No
Affordability assessed	Yes	No

Residential mortgages are a great alternative to equity release.

However, as you age, you will likely find that high street mortgage lenders may be less suitable than other specialist lenders, especially as many require mortgages to be repaid by your 75th birthday.

That's why we work closely with banks and building societies better suited to applicants aged 50 plus.

We have access to lenders that can provide interest-only mortgages that most high-street banks cannot.

We consider both mortgages and equity release as part of our advice process.

Credit cards compared to equity release

	Credit cards	Equity release
Speed	You should receive your credit card in the post within 2 weeks	approximately 8 weeks
Setup costs	None	> £1,500
Interest rate	Higher	Lower
Credit limit	Based on your creditworthiness/score	N/A. Minimum loan £10,000; maximum based on your property value
Monthly payments required	Yes	No
Affordability assessed	Yes	No

Credit cards can be very flexible as you only get charged interest on balances held on the card.

Many cards have interest-free periods, allowing you to repay the balance monthly without incurring interest charges.

Furthermore, you often find introductory offers with credit cards, allowing you to purchase without incurring any interest for 6 to 24 months (depending on the offer).

However, it's crucial that you have a way to repay the balance owed, as when your introductory period ends, you will be charged a much higher interest rate - often 20+%.

Many of our clients use equity release to repay the balances owed on their credit cards after their interest-free period has expired, especially if they are unable to roll the balance over to a new card with its own introductory offer.

Remember: although equity release interest rates are lower than credit card interest rates, equity release is designed to be long-term finance. It will likely cost more over the estimated term.

You should speak with your equity release advisor about taking equity release instead of a credit card, as their advice will be specific to your circumstances.

Bridging loans compared to equity release

	Bridging loan	Equity release
Speed	72 hours to 3 weeks	approximately 8 weeks
Setup costs	Typically 1% to 3% of the loan amount	> £1,500
Interest rate	Higher - typically 0.5% and 2% each month	Lower
Loan length	Up to 12 months	Until the last borrower passes or moves into care
Fixed-rate period	Duration of loan	Duration of loan
Loan sizes	Typically up to 75% of the property value	Minimum £10,000; maximum based on your property value
Monthly payments required	No	No

If you have a short-term need for a larger sum of money which unsecured cannot provide, bridging finance could be a good option for you. But how does it stack up compared to equity release?

Expect to be charged between 0.5% and 2% each month with bridging loans. However, the interest charges can often be added to the loan, to be repaid with the capital borrowed.

The interest charged on bridging finance reflects the short-term nature of the finance and also because there are no early exit fees if you can repay sooner.

With equity release, you will find lower interest rates, but, to access the market-leading rates, you can expect to incur larger early repayment charges when you repay.

That said, there are equity release plans with early repayment charge exemptions, which could allow you to repay penalty-free if your circumstances fit.

Furthermore, there are equity release plans which have no early repayment charges.

For both bridging loans and equity release, you will incur setup costs. Notably, for financial and legal advice, but with both options, you can generally add the setup costs to the loan borrowed.

Car finance compared to equity release

	Car finance	Equity release
Speed	Typically 1-2 working days from successful application	approximately 8 weeks
Setup costs	None	> £1,500
Interest rate	New cars typically lower; used cars typically higher	Rates from 5.88%
Fixed-rate period	Duration of loan	Duration of loan
Loan sizes	Depending on vehicle value and the affordability of the loan	Minimum £10,000; maximum based on your property value
Monthly payments required	Yes	No
Affordability assessed	Yes	No

If you need to raise finance to purchase a car then car finance could be a great option for you.

Brand new cars often come with offers on the finance which are hard to beat with other methods. However, if you are purchasing a used car, you will often find higher interest rates.

There are several car finance options, the most popular being PCP or Personal Contract Purchase.

PCP can offer a lower monthly payment than a personal loan or hire purchase (HP).

With PCP, you pay an initial deposit and agree to make monthly payments for a desired term, followed by a balloon payment at the end of the term to purchase the vehicle outright.

Equity release could be an option if you want to raise money for other needs in addition to purchasing a car or if you don't want to make monthly payments.

While a qualified equity release advisor has written this guide, it is not intended to be used as financial nor legal advice and should not be relied upon.

To understand the full features and risks of an Equity Release plan, ask for a personalised illustration.