HELOC vs. personal loan: How to decide

Picking the right borrowing solution is a key part of balancing your long-term and short-term financial needs. When you want to access the cash you need to accomplish your goals, you shouldn’t have to jeopardize your future finances in the process. Many tools are available to qualified borrowers – two of the most popular being HELOCs and personal loans.  

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This post will explore HELOCs vs personal loans, how to determine which is best for you, and alternative options to consider. 

How a HELOC works

A home equity line of credit (HELOC) allows you to tap into your home equity for a revolving line of credit, similar to a credit card. It's a type of second mortgage that uses your home as collateral to secure the loan. Based on this equity, the lender will offer a credit limit, typically up to 85% of your home’s equity. 

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HELOCs generally have a 10-year draw period during which you can borrow funds as needed and will only be responsible for interest-only payments. Once the repayment period begins, your balance will convert to a principal-plus-interest loan with a variable interest rate. You'll be on the hook for monthly payments over what's typically a 20-year term. 

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The funds can be used for any purpose. If you’re using the HELOC to improve your home, the interest paid may be tax-deductible. 

How a personal loan works

A personal loan is typically an unsecured loan based on your creditworthiness as a borrower. A lender will approve you for a set loan amount and then disburse funds in a single lump sum payment come funding.  

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Personal loans have fixed interest rates, which create predictable monthly payments over a term, typically 2 to 7 years.

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There are generally no restrictions on how you can use your funds. However, should you apply for a specialized personal loan (like a debt consolidation loan, IVF loan, or funeral loan), you may need to use most or all of the loan toward the primary purpose. 

HELOC vs personal loan: Key differences

Collateral

HELOCs: Home equity lines of credit require you to use your home as collateral. If you default, you risk foreclosure. 

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Personal loans: Collateral is not required to qualify, making personal loans significantly less risky. However, secured personal loans are an option for borrowers with less-than-ideal financial health or who want access to a larger lump sum of cash. 

Requirements

HELOCs: Besides owning 15% to 20% of home equity, you’ll need sufficient income, a credit score above 680, and a debt-to-income ratio below 43%. Qualifying for a HELOC with a lower credit score is challenging.

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Personal loans: Lenders will also review your creditworthiness as a borrower when determining loan eligibility and amount. Personal loan qualification depends on credit score, employment status, and income. Because many people use personal loans for debt consolidation, there are plenty of options for obtaining a loan with a poor credit score or a loan with a high debt-to-income ratio.

Funding timeline

HELOCs: Equity financing requires thorough underwriting and may also involve a home appraisal. Because of this, funding timelines typically take weeks. For a HELOC, you can expect a 2—to 6-week wait, depending on the complexity of your application and lender. 

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Personal loans: With an unsecured loan, you can get approved and funded in as little as a few days.

Fees

HELOCs: You’ll be on the hook for various upfront expenses. You can expect origination fees, appraisal fees, and closing costs. Origination fees can range from 1% to 2% of the credit limit, while appraisal fees can cost between $300 and $500. Closing costs may include title search and recording fees, which can add up to several hundred dollars.

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Personal loans: There are usually no appraisal or closing costs, making personal loans less expensive upfront. Origination fees range from 1% to 8% of the loan amount.

Loan amount

HELOCs: You can access up to $500,000 depending on how much equity you have and your creditworthiness. 

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Personal loans: Most lenders offer loans up to $50,000, however, few will allow you to borrow as much as $100,000. 

Interest rates:

HELOCs: Because your home secures a HELOC, it offers some of the most competitive interest rates on the market, 8.64%–10.72%. 

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Personal loans: Interest rates vary significantly depending on your credit score but are higher than secured loans. Current rates from perfect credit to poor credit are 10.73% to 32%. 

Repayment

HELOCs: Repayment is deferred until the draw period ends. Once the repayment period begins, you may experience fluctuations in your monthly payments since rates are variable. 

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Personal loans: Repayment begins a month after receiving your funds and consists of fixed monthly payments over the term.  

How to choose between a HELOC and a personal loan

Whether a HELOC or personal loan is best suited for you depends on your unique financial situation. It’s best to consider the following to weigh your options:

• Purpose: HELOCs are great for ongoing or unpredictable expenses, while personal loans are better for one-time, significant costs. 
• Repayment preferences: If you want flexibility, a HELOC can provide a deferred repayment period. If you value budgeting and predictability, a personal loan’s fixed payments would better suit your needs. 
• Risk tolerance: Using your equity as collateral means you could lose your home if you default on the loan. Additionally, you risk having an underwater mortgage if the market takes a downturn. If you doubt your ability to repay a HELOC, a personal loan is a safer choice. 

Alternatives to HELOCs and personal loans

If neither a personal loan or HELOC feels like a good fit, it’s worth exploring competitive alternatives: 

Home equity loan

If you have a major expense to finance but want predictable monthly payments, you may wish to explore home equity loans. Home equity loans allow you to use your home as collateral for a single lump sum payout. They come with fixed interest rates and set monthly payments over a 5 to 30-year term. Interest rates are more favorable than personal loans or credit cards but can be higher than HELOC rates. 

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Eligibility requirements are similar to HELOCs, though qualifying for a home equity loan with bad credit can be easier. 

Home equity investment

A home equity investment (HEI) is another financing tool that you can use to tap into your home's wealth. You receive a lump sum of cash in exchange for a share of your home's future appreciation. There are no monthly payments. Instead, you repay with a balloon payment anytime during a flexible 30-year term when you sell the house, refinance, or use a cash reserve. 

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HEIs are a great option for homeowners with a less-than-ideal financial profile or who are self-employed. There are no income or debt-to-income ratio requirements. You can qualify with sufficient equity and a credit score above 500. 

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You can prequalify for an HEI and get an estimate in minutes, with no impact on your credit score or commitment to apply. 

0% APR card

If you’d like the flexibility of a HELOC without the risk of a secured loan, a credit card is worth consideration. 0% APR credit cards offer an introductory period, typically 12-18 months, with no interest on purchases or balance transfers. This makes it easy to manage smaller expenses without the stress of interest charges—as long as you pay off the balance before the promo period ends. 

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Like a personal loan, your eligibility and how much you can borrow are tied to your creditworthiness. 

Final thoughts

Choosing between a HELOC and a personal loan ultimately depends on your financial situation, needs, and goals. Both offer unique advantages and potential drawbacks that should be weighed carefully. 

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On the other hand, if neither feels like the ideal solution, it's worth exploring alternatives with easier requirements or better repayment terms. Just remember to consider how any financing will impact you in the short and long term as you decide. 

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