Your Guide to HELOC vs. Personal Loans: Deciding What Works for You

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ByChristopher Boston
Reviewed byTimothy Manni
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ByChristopher Boston
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Reviewed byTimothy Manni
Edited byRae Osborn
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Updated: January 31, 2024

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Loans give you access to funds you might not have on hand, making it easier to cover costs like home renovations or emergency expenses. Among the various types available, two popular options are Home Equity Lines of Credit (HELOCs) and personal loans. While both offer you a way to secure funds, HELOCs generally use your home as collateral, whereas personal loans are often unsecured. Comparing HELOCs vs. personal loans is a savvy move because it can help you pick the loan that aligns best with your financial situation and needs.

What Is a HELOC?

A Home Equity Line of Credit (HELOC), is a loan type that allows you to borrow against the value of your home, making it your collateral. You're given a credit line you can draw from, much like a credit card, up to a certain limit. If you’re wondering how much you can borrow, lenders usually determine it as a percentage of your home's appraised value minus what you owe on your mortgage, if applicable.

You can use the funds from a HELOC for various purposes, like home improvements or consolidating high-interest debt. So when you're looking at Personal loan versus HELOC, remember that a HELOC ties the loan to your home's value and possibly your mortgage.

Benefits and Drawbacks of Getting a HELOC

HELOCs can offer lower interest rates and flexibility in how you use the funds. But don't get too comfortable just yet — like any loan, they come with their own risks, including the potential for foreclosure if you default. Our table highlights some pros and cons you should consider before pursuing a HELOC.

Benefits
Cons

Lower Interest Rates: HELOCs usually have lower interest rates compared to some other loan types, making them cost-effective.

Risk of Foreclosure: Because your home acts as collateral, failing to make payments can result in the loss of your home.

Flexible Usage: With a HELOC, you draw funds as needed, offering flexible access to capital.

Variable Interest Rates: HELOCs often come with variable interest rates, which means your payments can increase.

Possible Tax Benefits: In some cases, the interest you pay on a HELOC might be tax-deductible if used for home improvements.

Setup Costs: Initial costs such as appraisals can add to your overall borrowing expenses.

Revolving Credit: Unlike a one-time loan, you can reuse the credit as you repay it, making it adaptable for multiple projects or needs.

Equity Dependent: You can only borrow what your home equity allows, which may limit your access to large sums.

Streamlined Approval: If you already have a mortgage with the lender, the HELOC approval process could be quicker.

Payment Shock: When the draw period ends, you may face a significant increase in monthly payments.

While HELOCs offer the advantage of lower interest rates and flexible funds usage, they also carry risks like foreclosure and variable rates. It’s best to have a clear picture of these pros and cons before deciding it’s your best course of action.

What Is a Personal Loan?

A personal loan is a type of unsecured loan, which means you don't have to put up any assets like a house or car as collateral. Lenders decide your eligibility primarily based on your credit score and financial history. Personal loans are popular because they offer a fixed interest rate and set repayment terms, usually ranging from one to seven years. You can use the funds for various purposes — anything from consolidating debt to paying emergency bills. While there aren't many restrictions on how you use the money, it's wise only to borrow what you can comfortably pay back.

Benefits and Drawbacks of Getting a Personal Loan

Before you dive into the pool of personal loans, consider the water temperature, so to speak. One big benefit is the fixed interest rate, which means consistent monthly payments. Another plus is the ability to use the loan for diverse purposes, offering flexibility. But, one drawback is that these loans often come with higher interest rates than secured loans, making them more expensive in the long run.

Benefits
Drawbacks

Fixed Interest Rate: Monthly payments remain consistent, so making a budget becomes easier.

Higher Interest Rates: These loans are unsecured, leading to higher interest rates to offset the lender's risk.

No Collateral Needed: No risk to your home or car; your assets stay safe.

Fees and Charges: Origination fees and late payment penalties can add up.

Flexible Usage: Use the loan for anything from medical bills to vacations.

Limited Loan Amounts: Loan amounts are generally less than secured loans.

Quick Approval: You often receive funds quickly, sometimes within a day.

Strict Eligibility Criteria: You'll need a good credit score and stable income for approval.

No Risk to Assets: Defaulting won't put your home or car at risk, only your credit score.

Credit Score Impact: Missing a payment or defaulting will adversely affect your credit score.

Weighing these factors can help you gauge if a personal loan fits into your financial picture. Knowing what you're getting into can inform your choice and set you on a path that aligns with your goals.

Side-By-Side Comparison

A closer examination can often make all the difference. Here, you'll find a table that breaks down essential aspects of both loan types to help simplify your decision-making process. Remember, a variety of factors come into play when choosing between a HELOC and a personal loan.

Comparison Area
HELOC
Personal Loan

Eligibility

Requires home equity, good credit score.

Good credit score, stable income.

Interest Rates

Variable, usually lower.

Fixed, often higher.

Collateral

Your home.

None.

Loan Amounts

Up to 60% to 85% of home's equity.

Usually up to $50,000, but some lenders offer up to $100,000.

Repayment Terms

5 to 20 years, flexible payments.

1 to 7 years, fixed payments.

By focusing on these key areas, you get a clearer picture of what each loan type can offer and what the associated risks are. A balanced understanding sets you on the path to a decision that best serves your needs.

HELOC vs. Personal Loan: Which Is Better?

The best option between a HELOC and a personal loan depends on your specific situation. Beyond studying what each has to offer, you also have to examine your financial profile and personal preferences. Let's go through some important factors to consider:

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    Home Equity

    If you have significant home equity, a HELOC can offer lower interest rates. But remember, your home is the collateral.

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    Financial Goals

    A HELOC works well for ongoing expenses, whereas a personal loan is better for one-time, large expenditures.

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    Risk Tolerance

    With a HELOC, the stakes are higher since your home is on the line. Evaluate your comfort level with this kind of risk.

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    Loan Amount

    Personal loans might offer less money than you could access with a HELOC, depending on your home equity.

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    Repayment Flexibility

    HELOCs often have more flexible repayment options, but that also means you could end up paying it off for a longer period.

Knowing where you stand on these key considerations can guide you toward the choice that aligns with your financial landscape and peace of mind.

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MONEYGEEK EXPERT TIP

HELOCs and personal loans are two great options for homeowners to consider when looking to fund projects that will improve the value of their homes. However, the two loans are likely to be considered by two very different groups of homeowners. Longer-tenured homeowners who have established significant equity and need access to large amounts of cash should consider a HELOC. Newer homeowners who need access to a decent-sized pool of money should research personal loans. The fact that personal loans are not tied to your home and do not require steep equity makes them a valuable option for recent buyers to consider. — Timothy Manni, Mortgage and Real Estate Consultant

When You Should Get a HELOC

Understanding when to opt for a HELOC can help you leverage your home's equity to meet various financial needs without overwhelming your budget. Just like with personal loans, timing and context matter. Here are some relatable situations that shine a light on when a HELOC might be your best bet.

Multiple Home Improvements Over Time

Sarah, a 45-year-old nurse, has an older home that requires ongoing improvements. From a new HVAC system to kitchen upgrades, she knew that these projects would span several months. A HELOC was ideal because it allowed her to draw funds as needed, making it easier to manage the timeline and costs of her renovations.

College Tuition Fees

David and Mei, a couple in their late 40s, were looking at skyrocketing college tuition fees for their twin daughters. A HELOC provided them the flexibility to draw funds as college expenses became due instead of taking out a lump sum. The draw period allowed them to manage their debt and only borrow what they needed when needed.

Small Business Expansion

Carlos, a 33-year-old small business owner, saw an opportunity to expand his restaurant but lacked the upfront capital to seize it. A HELOC made sense for him, as he could take out only the amount needed for particular aspects of his expansion, such as refurbishing or marketing, and repay it before drawing more money for the next phase.

Unpredictable Medical Costs

Rita, a 60-year-old retiree, was diagnosed with a chronic illness that would require long-term care and various treatments. A HELOC offered her the flexibility to cover these costs as they arose without having to predict the total amount needed upfront. The revolving credit nature of a HELOC provided her peace of mind during a challenging time.

When You Should Get a Personal Loan

Gaining the right insights about when to secure a personal loan can be a strategic asset for your financial portfolio. It allows you to allocate funds effectively while planning for sensible repayments. Let's explore various life scenarios to show when a personal loan might be your go-to option.

Tackling High-Interest Debt

Emily, a 35-year-old marketing professional, found herself overwhelmed with multiple credit card balances, all boasting staggering interest rates. Instead of chipping away at each card one by one, Emily decided to wrap all her debts into one personal loan with a far more reasonable interest rate. It streamlines her monthly payments and brings her financial life back into focus.

Medical Emergency

At 42, Raj, a freelance designer, had never thought much about health insurance until he found himself in the emergency room facing a steep bill. With a personal loan, Raj could cover these unexpected costs almost immediately, thanks to the loan's quick approval process. This way, he could concentrate more on his recovery rather than how to scrape together the funds.

Wedding Expenses

Aisha, a 27-year-old schoolteacher, was knee-deep in wedding plans when she realized her dream day was going over budget. She weighed her options and decided that the vision she had for her big day was non-negotiable. A personal loan came to her rescue. With the additional funding, Aisha was able to create the magical wedding she had always wanted without compromising on any details.

Home Improvement

Jack, a 52-year-old contractor, had been toying with the idea of adding a home office for years. With work-from-home becoming the norm, he figured now was the perfect time to act. Instead of dipping into his savings, Jack took out a personal loan. It enabled him to build his home office which would increase his property's overall value.

Alternative Financing Options

If you find that neither a HELOC nor a personal loan is the perfect fit for your financial situation, don't worry. There are plenty of other avenues to explore when it comes to securing the funds you need. Let's dive into some alternatives.

Alternative
Pros
Cons

Easy to apply for and quick access to funds. Useful for small, short-term needs.

High interest rates make them expensive for long-term borrowing.

Peer-To-Peer Lending

Often have lower rates and flexible terms. Good for those with less-than-stellar credit.

Requires a lengthy approval process and sometimes involves origination fees.

Fixed interest rates and payments. Good for large, one-time expenses like home improvements.

Puts your home at risk and involves closing costs.

Family Loan

No credit check and potentially lower interest rates.

Can strain relationships and lacks legal protections.

No credit check and you're paying interest to yourself.

Risk of hefty tax penalties if not repaid on time.

Exploring all your options gives you the upper hand in finding the right financial solution. Whether it's a credit card for small, quick purchases or a more structured 401(k) loan, the perfect fit is out there for you.

Frequently Asked Questions

Sometimes, the nitty-gritty details can make all the difference in your financial decisions, so use this section to learn from commonly asked questions about HELOCs and personal loans. You can make it into a resource to help guide your financial planning.

How does a HELOC compare to a personal loan?
When considering costs, is a HELOC more affordable than a personal loan?
Are there specific situations where a HELOC might be more suitable than a personal loan?
In terms of flexibility, how does a HELOC differ from a personal loan?
Can you explain the impact of collateral on a HELOC versus a personal loan?
What considerations should borrowers keep in mind when choosing between these options?
What are some common uses for a HELOC versus those for a personal loan?
Are there circumstances where a personal loan might be a more preferable choice than a HELOC?
What are the potential benefits of a HELOC that a personal loan might not offer?

About Christopher Boston


Christopher Boston headshot

Christopher (Croix) Boston was the Head of Loans content at MoneyGeek, with over five years of experience researching higher education, mortgage and personal loans.

Boston has a bachelor's degree from the Seattle Pacific University. They pride themselves in using their skills and experience to create quality content that helps people save and spend efficiently.