Pro tip: When you’re comparing HELOCs, pay extra attention to the margin — the amount added to the prime rate to create your 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, which could cost you much more in the long run.
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Compare personal loans vs. home equity lines of credit (HELOCs)
Choose between a lump sum loan or revolving line of credit.
When you’re looking for financing, you’ll find options to fit most any situation or goal. Two of the most popular 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.
Quick snapshot: 6 ways personal loans and HELOCs differ
| Personal loan | HELOC | |
|---|---|---|
| Is collateral required? | Depends on whether you choose a secured or unsecured loan | Uses your home’s equity as security |
| Access to funds | A lump sum is direct-deposited to your bank account from the lender | Approved funds can be taken as needed during the draw period—may be subject to a minimum draw amount |
| Interest rate | Fixed rate or variable rate, depending on the lender | Variable rate, though some lenders allow you to lock in set amounts at a fixed rate for repayment |
| Repayment terms | Monthly repayments, including your principal and interest over a specified time | Interest-only payments until the draw period is complete, followed by full payments, for the amount you withdrew during the draw period |
| Fees | May charge a prepayment fee for paying off your loan early | May require an appraisal fee, an application fee and annual maintenance fees over your repayment term May also charge a prepayment fee for paying off your loan early |
| Loan terms | Typically 3-5 year terms, depending on the lender | Typically a 10-year draw period followed by a 20-year repayment period, depending on the lender |
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Both personal loans and HELOCs have many benefits
Personal loans
- Collateral not required. You won’t need to secure your personal loan with assets like your home or car. There are plenty of unsecured personal loan options available.
- Simple application. A typical personal loan requires far less paperwork and time than a HELOC.
- Quick turnaround. Depending on your lender, you could receive your loan funds in only a few days.
HELOCs
- Typically lower initial rates. Because your home’s equity effectively secures what you borrow, your initial interest rate may be lower than with a personal loan.
- 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.
Keep these drawbacks in mind
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
- Long application process. To establish equity, you need a home appraisal on top of the waiting period you’ll find with any mortgage product.
- You could lose your home. 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 loan term.
Choose a HELOC if you need access to funds long-term
A HELOC is more like a credit card than a loan, offering access to a set amount of money that you can draw on as needed. That way you only have to pay for the amount you draw, not the full amount of the credit line.
If you own a home, want to borrow a significant sum of money and are willing to use your property as collateral, 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 you’ve built up enough equity in your home to cover the amount you need.
Choose a personal loan if you need a lump sum
Personal loans are great when you need a set sum of money all at once, but you also need to pay them back fairly quickly.
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 if 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 your personal loan options against your home equity options to see which proves to be the better deal for your budget.
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