HELOC vs Personal Loan: The Winner Declared
HELOCs are better for: Large expenses (over $25,000), lower rates, and when you want to borrow and pay back as needed.
Personal loans are better for: Expenses under $25,000, getting cash quickly, and predictable payments.
Let’s dig deeper to see which loan type prevails examining 11 common loan features.
Definitions
A home equity line of credit (HELOC) is a second mortgage secured by your home. It lets you turn home equity into cash for nearly any purpose.
A personal loan is an unsecured loan, meaning there’s no collateral. The lender issues funds based on its assessment of your ability to repay.
1. Loan Term: Winner - HELOC
If you need a longer borrowing horizon, a HELOC is the clear winner. You get a 10-year draw period in which you can borrow and pay back as needed. The loan then converts to a 10- to 20-year repayment period where you make regular principal and interest payments.
Personal loan terms are typically only up to seven years. Shorter terms mean payments could be unaffordable. But longer terms come with higher interest rates.
2. Interest Rates: Winner - HELOC
HELOCs are secured against the home. Because there’s collateral, lenders typically offer lower rates. Many HELOC lenders issue rates near the prime rate (8.5% at the time of this writing) or slightly above.
According to CNN, average personal loan APR averages about 15% for 3-year terms and 21% for 5-year terms.
Still, applicants with excellent credit needing shorter terms may find personal loan rates near HELOC ones: the lowest APRs available at the time of this writing range from 7.99% to 8.99% from many lenders.
3. Available Loan Size: Winner - HELOC
If you need a big loan, a HELOC may be the only way to go.
While a few personal loan lenders offer loans up to $100,000, many top out at around $40,000 to $50,000.
It’s not unheard of to get a HELOC up to $500,000.
Your maximum HELOC size depends on your home equity and current mortgage balance. You can usually borrow up to 90% of your home’s value, depending on the lender.
Home Value | $500,000 |
X 90% | $450,000 |
Minus 1st Mortgage Balance | -$250,000 |
Max HELOC | $200,000 |
Even if you could borrow this much with a personal loan, it could be unwise: even a loan as small as $25,000 at 21% would cost you $5,000 in interest during the first year.
4. Closing Costs: Winner - Personal Loan
This one is nearly a toss up: you can find no-closing-cost HELOCs and personal loans.
However, the slight advantage goes to personal loans because HELOC lenders may require fees associated with any mortgage: an appraisal, local county recording, and title services.
HELOCs are also more likely to come with an annual fee and early closing fees. But applicants who shop around may avoid most or all HELOC fees.
5. Credit Score: Winner - Personal Loan
While low-credit personal loan interest rates are sky-high, at least they are available. HELOC lenders may set a minimum credit score of 660-700. Many personal loan lenders advertise minimum credit scores between 560 and 600.
6. Lenders: Winner - Toss-Up
There are nearly limitless sources of financing for both HELOCs and personal loans. You can find dozens of lenders for each with a quick online search. You may find better deals for HELOCs, though, by calling your local bank or credit union. Many smaller lenders don’t advertise extensively online.
Be connected with a lender here.
7. Barrier to Entry: Winner - Personal Loan
To get a HELOC, you have to own a home. You also need equity in the home. And the lender will likely be more stringent about credit, income, and assets.
Many personal loans can be completed almost entirely online. You don’t need to own a home or put up any collateral. Personal loans are available to a much larger segment of the population.
8. Risk: Winner - Personal Loan
If you default on a personal loan, your credit will take a big hit. But you won’t lose your house or any other asset.
With a HELOC, your home is at stake if you don’t pay. While foreclosures are rare, the lender has the legal right to take the home to cover losses.
9. Speed and Convenience: Winner - Personal Loan
Some personal loan lenders let you apply and fund your loan completely online. Funds are sometimes available the same day.
HELOCs are mortgages, so they will likely require an in-person signing appointment toward the end of the process, as electronic signing is less common for home loans. Plus, it could take weeks to see funds. If you need funds in days not weeks, a personal loan is your best bet. You can always consolidate it with a HELOC later.
10. Flexibility: Winner - HELOC
Let’s assume you need funds for an upcoming remodel and want an open credit line, but don’t want to borrow yet. You also plan to use funds to complete the first phase of the project, pay it back, then re-borrow for the second phase. Then you want an open credit line after the project is complete to start your own business.
Only a HELOC provides this flexibility. You can often open a zero-balance HELOC and let it sit there as an emergency fund, borrow as needed, repay, and borrow again.
A personal loan is usually closed-ended. You take a lump sum and repay it with regular payments. You can’t borrow again when you pay down the balance.
11. Payment Stability: Winner - Personal Loan
A personal loan is similar to a car loan: it’s a fixed rate with regular principal and interest payments.
A HELOC rate is variable, meaning your payment rises and falls according to economic conditions at the time.
However, you can get a home equity loan, a fixed second mortgage with predictable payments. Home equity loan rates could be lower than those for personal loans.
HELOC vs Personal Loans: Winner - It's a Tie
There’s no winner or loser in this fight: either loan can help you accomplish your goals.
Examine both loan types to see which one is better for your situation.
