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Personal loan vs. HELOC

Choose between a lump sum loan or a revolving line of credit.

When you’re looking for financing, you’ll find options to fit almost any situation or goal. Two popular options are personal loans and home equity lines of credit (HELOCs). Personal loans are usually unsecured and come with fixed interest rates, whereas HELOCs typically have variable interest rates and are secured by your home.

Quick snapshot: 8 ways personal loans and HELOCs differ

Personal loanHELOC
Is collateral required?Depends on whether you choose a secured or unsecured loanUses your home’s equity as collateral
Access to fundsA lump sum is direct-deposited to your bank account from the lenderApproved funds can be taken as needed during the draw period — may be subject to a minimum draw amount
Interest rateFixed rate or variable rate, depending on the lenderVariable rate, though some lenders allow you to lock in a fixed rate for repayment
Repayment termsEqual monthly installments, including principal and interest over a specified timeInterest-only payments until the draw period is complete, followed by full payments for the remaining balance
FeesMay charge an origination fee

May charge a prepayment fee for paying off your loan early

May require an appraisal fee, an application fee and annual maintenance fees

May charge a prepayment fee for paying off your loan early

Loan termsTypically 2- to 7-year terms, depending on the lenderTypically a 10-year draw period, followed by a 20-year repayment period, depending on the lender
Loan amountsTypically no more than $100,000Usually up to 80% to 85% of your home’s equity
Typical requirementsGood credit, low debt-to-income ratio, regular incomeAt least 20% in equity, a loan-to-value ratio of 85% or less, good credit, steady income
Pro tip: When comparing HELOCs, pay extra attention to the margin — the amount added to the prime rate to create your interest rate. 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.

Compare personal loan options

Name Product Filter Values APR Min. credit score Loan amount
Best Egg personal loans
Finder Score: 3.8 / 5: ★★★★★
Best Egg personal loans
8.99% to 35.99%
640
$2,000 to $50,000
Fast and easy personal loan application process. See options first without affecting your credit score.
Upstart personal loans
Finder Score: 4.2 / 5: ★★★★★
Upstart personal loans
7.80% to 35.99%
300
$1,000 to $50,000
This service looks beyond your credit score to get you a competitive-rate personal loan.
SoFi personal loans
Finder Score: 4.4 / 5: ★★★★★
SoFi personal loans
8.99% to 29.99% fixed APR
680
$5,000 to $100,000
A highly-rated lender with competitive rates, high loan amounts and no required fees.
Upgrade
Finder Score: 4 / 5: ★★★★★
Upgrade
8.49% to 35.99%
620
$1,000 to $50,000
Check your rates with this online lender without impacting your credit score.
LendingPoint personal loans
Finder Score: 3.3 / 5: ★★★★★
LendingPoint personal loans
7.99% to 35.99%
620
$2,000 to $36,500
Get a personal loan with reasonable rates even if you have a fair credit score in the 600s.
Happy Money
Finder Score: 3.8 / 5: ★★★★★
Happy Money
11.72% to 24.50%
640
$5,000 to $40,000
Pay down your debt with a fixed APR and predictable monthly payments.
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What is a personal loan and how does it work?

A personal loan allows you to borrow a lump sum in exchange for repaying the loan in equal monthly installments. Personal loans are usually unsecured (but can be secured) and typically come with fixed interest rates — although some lenders may charge variable rates.

Pros

  • Lump sum payment. You receive the money in one lump sum, which you can typically use however you want.
  • No collateral required. You won’t need to secure your personal loan with assets like your home or car.
  • Quick application process. A typical personal loan requires far less paperwork and time than a HELOC.
  • Fast turnaround time. Depending on your lender and your preparedness, you could receive your loan funds in just a few days.
  • Fixed repayments. Equal monthly payments can be easier to budget for.

Cons

  • Higher interest rates. Because personal loans are usually unsecured, interest rates are typically higher than with secured loans.
  • Lower loan amounts. While maximum loan amounts vary by lender, you usually can’t borrow as much money with an unsecured personal loan.
  • Need good credit. If your credit isn’t very good, you may not qualify for the loan or you may have to put up collateral to secure the loan.
  • Fees. Personal loans may come with origination or processing fees and prepayment penalties for late payment fees — which can all add to the loan’s total cost.

What is a HELOC and how does it work?

A home equity line of credit (HELOC) gives you access to a revolving line of credit similar to a credit card. It uses your home as collateral for the loan and most commonly comes with a variable interest rate.

You can draw on the line of credit as often as you like up to the borrowing limit and within the draw period, which is usually 10 years. You’ll only be required to make interest payments during the draw period. Once the draw period is up, you’ll need to make principal and interest payments for the remainder of the loan term.

Pros

  • Only borrow what you need. Because you have access to a revolving credit line, you can borrow as much or as little as you need up to your borrowing limit.
  • Flexible repayments. You’re only required to make interest payments during the draw period, but you can always pay more than the minimum to save money down the road.
  • May be able to deduct interest. If you’re using the HELOC funds to make home improvements, you may be able to deduct your interest payments on your tax return.
  • Longer loan terms. With a draw period of 10 years and a typical repayment term of 20 years, you have a lot longer to repay your HELOC than you would with a personal loan.

Cons

  • Long application process. There’s a lot more paperwork and hoops to jump through when establishing your home’s equity and applying for a HELOC.
  • Unpredictable payments. HELOCs usually come with variable interest rates so your monthly payments may fluctuate over time, which can make budgeting more difficult.
  • More fees than personal loans. HELOCs can require an appraisal fee, an application fee and annual maintenance fees over the loan term.
  • Home at risk. HELOCs use your house as collateral, so if you can’t make your payments and default on the loan, you could lose your home.

When to choose a personal loan vs. home equity line of credit

Deciding between a personal loan and a home equity line of credit may be a tough decision, but there are a few reasons why a personal loan might make more sense.

  • Lack of equity. If you don’t have enough equity in your home, you may not be able to qualify for a HELOC.
  • You need quick funding. If you need money soon, a personal loan is much faster to qualify for than a HELOC.
  • Don’t need as much money. If you only need a relatively small loan amount, a personal loan may make more sense than a HELOC.
  • Don’t want to risk home. If you’re worried about the risk of using your house as collateral, a personal loan may be a safer choice.

When to choose a home equity line of credit vs. a personal loan

On the other hand, there are many reasons why a HELOC may be a better fit for you and your financial goals.

  • You have a lot of equity. If you have a lot of equity in your home (or better yet, it’s paid off), getting a HELOC over a personal loan may make more sense.
  • You want to make home improvements. If your loan purpose is to make improvements on your house (thereby increasing its value), a HELOC could be a smart move. Plus, you may be able to deduct your interest payments from your taxes.
  • You don’t need a lump sum. If you don’t need the entire loan amount up front and prefer to borrow only as much as you need when you need it, a line of credit might be a better choice.
  • You want a longer loan term. If you plan to borrow a significant sum and want more time to repay, a HELOC has a longer loan term.

Alternatives to HELOCs and personal loans

After researching, you may decide that neither a personal loan nor a HELOC is the right choice. Consider these alternatives instead.

  • Cash-out refinance. A cash-out refinance is when you swap out your existing mortgage for a new loan that’s more than your existing loan balance and receive the difference — your home’s equity — in cash.
  • Home equity loan. A home equity loan is similar to a HELOC in that you borrow against your home’s equity, but the loan proceeds come in a lump sum payment rather than a revolving line of credit.
  • 0% credit cards. Depending on the amount you want to borrow, applying for a credit card with a 0% introductory period might be a good idea if you can repay the money before the introductory period ends.
  • Business loan. If you intend to use your loan proceeds to start a company or grow your existing business, consider a small business loan instead. Or, if you can meet the stricter requirements, an SBA loan could get you a better interest rate.

Compare personal loans to other types of loans

Bottom line

When deciding between a personal loan or a HELOC, consider how much you want to borrow, the purpose of the loan, how much equity you have, how you want to repay it and your personal finance situation. Whichever you decide, be sure to do your research, compare multiple lenders and consider alternative forms of funding.

Compare your personal loan options against your home equity options to find the better deal for your budget.

Frequently asked questions

Is there a better option than a HELOC?

Whether there is a better option than a HELOC depends on your unique financial situation. For example, some things to consider are whether you want to risk losing your home as collateral or if you have unexpected expenses you need to pay for soon.

Is a HELOC cheaper than a personal loan?

Because a HELOC uses your home as collateral, you can usually get a better interest rate than a personal loan. However, you need to consider the fees and term length of each to determine which is less expensive in the long run. If you’re unsure, talk to a loan officer to help you run the numbers.

What happens if I can’t repay my loan?

That depends on the type of loan you have. For example, if you have an unsecured personal loan, the bank cannot seize your assets to repay the loan. But they can cause serious damage to your credit profile and take you to court for repayment. If you default on a HELOC, which is essentially a second mortgage, the lender can take your home and resell it to pay your debt.

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Writer

Lacey Stark is a freelance personal finance writer for Finder, specializing in banking, loans, investing, estate planning, and more. She has 20 years of experience writing and editing for magazines, newspapers, and online publications. A word nerd from childhood, Lacey officially got her start reporting on live sporting events and moved on to cover topics such as construction, technology, and travel before finding her niche in personal finance. Originally from New England, she received her bachelor’s degree from the University of Denver and completed a postgraduate journalism program at Metropolitan State University also in Denver. She currently lives in Chicagoland with her dog Chunk and likes to read and play golf. See full bio

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