Personal loans vs. home equity lines of credit (HELOCs) | finder.com

Compare personal loans vs. home equity lines of credit (HELOCs)

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Which of these two borrowing options are best for your needs?

When you’re looking for financing, you’ll find options to fit most any situation or goal. Among your options are personal loans and home equity lines of credit (HELOCs).

Both can get you the money you need, but with key differences that involve your personal assets and overall financial security. Here’s how to compare them to determine which is right for you.

Prosper

Prosper

You could borrow up to $40,000 for a variety of purposes, with rates starting from 6.95%.

  • Recommended Credit Score: 640 or higher
  • Minimum Loan Amount: $2,000
  • Maximum Loan Amount: 40000
  • Loan Term: 3 or 5 years
  • Turnaround Time: 1-3 business days
  • Simple online application process
  • No prepayment penalties

    How do personal loans differ from HELOCs?

    • Whether they require collateral. Personal loans are unrestricted funding to use however you please without the hassle of putting up collateral. Most personal loans are unsecured, while you can find some lenders offering secured personal loans at slightly lower interest rates. As its name implies, a home equity line of credit is secured by the equity you’ve built up in your primary residence. Because you’re borrowing against your home’s equity, how much you can get depends on that equity. For example, if you’ve built up $150,000 but still owe $200,000 on your mortgage, the most you could qualify for with a HELOC is $150,000, though it might even be 80% to 90% of that amount.
    • How you can access funds. With a personal loan, a lender disburses your approved funding in one go. With a HELOC, you’re approved for a specific amount, but you take from it only what you need as you need it during a “draw period” — the window of access to your funds, which can last up to 20 years depending on your loan terms. You can usually just make interest-only payments during the draw period. After this period is over, the repayment period begins and you have to pay off the principal of the HELOC along with the interest.
    • Your interest rates. Personal loan options include both predictable fixed rates and variable rates that fluctuate over the life of your loan. HELOCs come with only variable rates: You might start with a low interest rate — and possibly interest-only payments during your draw period — but your rate will fluctuate over your repayment term. As will your monthly payments. This is because a HELOC’s interest rate is determined by the prime rate plus the margin designated by your bank or lender.
    • How you repay the loan. Personal loans come with monthly repayments that include your principal and interest over a specified time. With a HELOC, you make monthly repayments only for the amount you withdrew during the draw period. You might have the option of repaying interest only during your draw period, but this depends on your specific HELOC.

    Quick snapshot: Four ways personal loans and HELOCs differ

    Personal loanHELOC
    CollateralNone, unless specifically applying for a secured loanThe equity you have in your home
    Access to funds Direct deposit to bank account from lender, all at onceApproved funds can be taken as needed during draw period
    Interest rateFixed rate or variable rate depending on the lenderVariable rate only
    Repayment terms Monthly repayments, including your principal and interest over a specified timeMonthly repayments, only for the amount you withdrew during the draw period
    Pro tip: When you’re comparing HELOCs, pay extra attention to the margin designated by your bank or lender in determining the interest rate. Make sure to ask what the margin is during the draw period and the repayment period, as sometimes lenders will have a higher margin during the repayment period.

    Compare personal loan options

    Rates last updated June 21st, 2018

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    Unfortunately, none of the personal loan providers offer loans for that credit score. If you are in urgent need of a small loan, you might want to consider a short term loan.
    Name Product Product Description Minimum Credit Score Max. Loan Amount APR
    Best Egg Personal Loans
    A prime lender with multiple repayment methods.
    640
    $35,000
    5.99%–29.99% (fixed)
    Upgrade Personal Loans*
    Affordable loans with two simple repayment terms and no prepayment penalties.
    620
    $50,000
    5.96%–35.97% (fixed)
    LendingPoint Personal Loans
    Get a personal loan with reasonable rates even if you have a fair credit score in the 600s.
    600
    $25,000
    15.49%–34.99% (fixed)
    Even Financial Personal Loans
    Get connected to competitive loan offers instantly from top online consumer lenders.
    580
    $100,000
    4.99%–35.99% (fixed)
    SoFi Personal Loan Fixed Rate (with Autopay)
    No fees. Multiple member perks such as community events and career coaching.
    740
    $100,000
    6.199%-15.365% (fixed)
    Monevo Personal Loans
    Quickly compare multiple online lenders with competitive rates depending on your credit score.
    580
    $100,000
    3.09%–35.99% (fixed)
    Prosper
    Borrow only what you need for debt consolidation, home improvements and more — with APRs based on overall creditworthiness.
    640
    $40,000
    6.95%–35.99% (fixed)
    Laurel Road Personal Loans
    Get a personal loan with no application or origination fees and a rate discount for autopay.
    680
    $45,000
    5.5%–11.74% (fixed)
    FreedomPlus Personal Loans
    Consolidate debt and more with these low-interest loans. Cosigners welcome.
    640
    $35,000
    4.99%–29.99% (fixed)
    LendingClub Personal Loan
    A peer-to-peer lender offering fair rates based on your credit score.
    660
    $40,000
    5.98%–35.89% (fixed)
    CompareFirst Personal Loans
    An easy-to-use loan connection service geared toward introducing first-time borrowers to affordable personal loans.
    580
    $50,000
    2.99%–36% (fixed)
    OneMain Financial Personal and Auto Loans
    An established online and in-store lender with quick turnaround times. Poor credit is OK.
    Varies
    $30,000
    16.05%–35.99%* (fixed)
    NetCredit Personal Loan
    Check eligibility in minutes and get a personalized quote without affecting your credit score.
    550
    $10,000
    34%–155% (fixed)

    Compare up to 4 providers

    What are the benefits of personal loans and HELOCs?

    Personal loans

    • Collateral not required. You won’t need to secure your personal loan with assets like your home or car.
    • Simple application. Your typical personal loan is easy to apply for and requires far less paperwork and time required for a HELOC.
    • Quick turnaround. Depending on your lender, you could begin using your loan in just a few days.

    HELOCs

    • Typically lower initial rates. Because your home’s equity effectively secures what you borrow, your initial interest rate can be decent. But your rate is variable, which means rising prime rates ultimately affect how much you pay each month.
    • Borrow only what you need. During your HELOC’s draw period, you withdraw only what you need up to your approved limit.
    • Tax-deductible interest. Like the interest you pay on your mortgage, you can usually deduct your HELOC’s interest from your taxes.
    • Longer loan terms. You’ll see some HELOCs with repayment terms of up to 20 years — far longer than your typical personal loan.

    What are the tax implications of personal loans?

    What are the drawbacks of personal loans and HELOCs?

    Personal loans

    • Higher interest. While personal loans tend to come with lower interest than credit cards, the rates are noticeably higher than those offered through HELOCs.
    • Typically lower maximums. While you’ll find a few banks and online lenders willing to lend you up to $100,000, personal loans typically top out at $50,000.
    • Good to excellent credit required. The more you want to borrow, the higher the credit score you should have. Your score will significantly influence how much you get and the loan’s APR.

    HELOCs

    • Limited to homeowners. A perk of homeownership is borrowing against the equity you’ve so carefully built up in your home. If you don’t own a home, this option is off the table.
    • Interest rate tied to prime rate. When the Fed raises the prime rate, your interest rate will go up — which can dramatically affect how much you pay each month.
    • Long application process. To establish equity, you need a home appraisal, on top of the many fees and waiting period you’ll find with any mortgage.
    • You could lose your home. It’s not called a second mortgage for nothing. Because you’re essentially taking out credit secured by a lien on your home, if you default, you could lose your house to foreclosure.
    • More fees. HELOCs can require an appraisal fee, an application fee and even annual maintenance fees over your repayment term. Confirm all fees you face with your specific HELOC before signing a contract.

    Which borrowing option is better suited for me?

    If you’re looking at borrowing a lot of money and you own a home, a HELOC can get you a low initial rate and longer repayment terms than you’ll find with your typical personal loan. But you’ll need to confirm that you’ve built up enough equity in your home to cover the amount you need.

    If you don’t own a home or don’t want to risk its equity, a personal loan can offer predictable monthly payments at fixed or variable rates and terms to suit most any need.

    Bottom line

    When deciding between a personal loan or a HELOC, it comes down to how much money you’re looking for and whether you have the home equity to support it. No matter which you ultimately choose, pay close attention to your specific repayment terms before signing a contract.

    Compare personal loans to even more borrowing options

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    US Personal Loans Offers

    Important Information*
    Even Financial Personal Loans

    Get connected to competitive loan offers instantly from top online consumer lenders.

    Prosper

    Borrow only what you need for debt consolidation, home improvements and more — with APRs based on overall creditworthiness.

    LendingClub Personal Loan

    A peer-to-peer lender offering fair rates based on your credit score.

    SoFi Personal Loan Fixed Rate (with Autopay)

    No fees. Multiple member perks such as community events and career coaching.

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