HELOC vs. personal loan: Which is better for borrowing money?
There are many ways to borrow money if you need it. For example, if you’re a homeowner, you could tap into your equity with a home equity line of credit (HELOC). Or you might consider an unsecured personal loan that doesn’t require collateral. In any case, it’s critical to compare your options so you can make the right choice based on your goals, finances, and budget.
Here’s what to know if you’re considering a HELOC vs. a personal loan, including how both options work and what the costs look like.
HELOC vs. personal loan
There are two main differences between a HELOC and a personal loan. First, a HELOC is secured (meaning it’s backed by collateral), while most personal loans are unsecured (meaning they don’t require collateral). Not having collateral behind personal loans makes them riskier for lenders, which can result in higher rates and less favorable terms compared to HELOCs.
Second, a HELOC is a type of revolving credit line that you can withdraw funds from and then repay on a repeated basis over an extended period of time. Personal loans, in comparison, provide a one-time lump sum that you’ll pay back in fixed installments.
Here are some of the other ways that HELOCs and personal loans compare:
| HELOCs | Personal loan | |
|---|---|---|
| Secured by collateral? | Yes (your home) | Typically no |
| Interest rates | Variable (can sometimes have fixed-rate options) Often lower than personal loan rates because of lower lender risk | Fixed Often higher than HELOC rates because of greater lender risk |
| Payout | Revolving credit line you can withdraw from over time (during the draw period) | One-time, lump sum |
| Risk | Could lose your home if you don’t make payments | Your account could be sent to collections Damage to your credit Could be sued by the lender |
| Funding time | Typically 2 to 6 weeks | As soon as the same day after approval (depending on the lender) |
| Borrowing limits | Up to 90% of your home equity (minus your current mortgage balance) | $300 to $100,000 |
| Credit score required | At least 620 (some lenders require higher scores) | 670 (some lenders accept lower scores) |
| Repayment terms | Typically 10-year draw period followed by 20-year repayment period | 1 to 7 years (can be longer for some loans) |
HELOC vs. personal loan: Which is better?
In general, HELOCs can be a good bet if you want ongoing access to cash over a long period of time, want lower interest rates, and need a longer payoff timeline. Personal loans, on the other hand, are generally better if you’re looking for fixed rates, stable payments, and fast funding, or if you don’t want to put your home on the line as collateral.
| If you want… | Consider a… |
|---|---|
| If you want predictable monthly payments… | Personal loan |
| If you want lower interest rates… | HELOC |
| If you don’t want to use your home as collateral… | Personal loan |
| If you want continued access to cash or aren’t sure how much you need to borrow… | HELOC |
| If you want fast funding… | Personal loan |
| If you want a long payoff timeline… | HELOC |
Personal loans
Best for: Predictable rates and payments as well as fast funding
Personal loans are typically unsecured loans that don’t require collateral. They provide a one-time, lump-sum payment, which you’ll repay (plus interest) over a period of several months or years. These loans can be used for almost any purpose.
Pros and cons
Pros
- Typically don’t require collateral, so your house and other assets aren’t at risk
- Feature fixed rates, which make your payments stable and easy to predict
- Many lenders offer fast funding
Cons
- If need access to additional funds, you’ll have to take out another loan
- Interest rates tend to be higher compared to secured loans like HELOCs
- Shorter repayment periods compared to HELOCs
Requirements
The qualifications for a personal loan are different for every lender, but you can generally expect to need the following:
- Good credit: This usually means a credit score of at least 670.
- Low debt-to-income (DTI) ratio: This compares your income to your monthly debt payments. For personal loans, you’ll typically need a DTI ratio of 36% or less.
- Sufficient income: Lenders want to see that you can afford an additional monthly payment.
- Existing customer relationship: In some cases, you might need an existing customer relationship with the bank or lender you’re applying with.
Find out: What is a good credit score?
Interest rates
Personal loans typically have fixed interest rates, which means your rate and payment will stay the same throughout the life of the loan. Rates for personal loans are typically higher than HELOC interest rates. This is because personal loans aren’t usually secured by collateral, making them a riskier investment for lenders.
Borrowing limits
Personal loans can range from just a few hundred dollars up to $100,000, depending on the lender. Keep in mind that you’ll typically need good to excellent credit to qualify for the largest amounts, as these are riskier for lenders.
Home equity lines of credit
Best for: Ongoing access to funds or if you don’t know exactly how much you need to borrow
HELOCs let you tap into your equity with a revolving credit line. You can draw funds from that credit line and pay it off on a repeated basis over many years. HELOCs usually have variable interest rates, but you’ll pay interest only on the amount of money you actually borrow, not your full credit limit.
Pros and cons
Pros
- Can access funds over an extended period
- Will pay interest only on the amount you withdraw
- Might only be required to make interest-only payments during the draw period, depending on the lender
Cons
- Use your home as collateral, which means you risk foreclosure if you don’t make your payments
- Typically have variable interest rates, which can fluctuate based on market conditions
- Can have unpredictable monthly payments due to variable rates
How HELOC draw periods work
HELOCs feature two distinct periods: the draw period and the repayment period. During the draw period, you’re free to withdraw funds from your credit line (up to your credit limit) as often as you’d like. You might be required to make interest-only payments during this time, depending on the lender.
After the draw period ends, you’ll enter the repayment period. At this point, you’ll no longer be able to withdraw money and must start repaying what you’ve borrowed, usually in monthly installments. Draw periods for HELOCs are typically 10 years while repayment periods are often 20 years, though this can vary by lender.
Find out: Is a HELOC worth it?
Requirements
To qualify for a HELOC, you typically need:
- Fair or good credit: A fair credit score is usually considered to range from 580 to 669, while good credit scores are 670 and higher. For a HELOC, you might get approved with a fair credit score of at least 620, though some lenders require higher scores than this.
- Low DTI ratio: For HELOC, your DTI ratio should be no higher than 40% to 50%.
- Sufficient equity: You’ll generally need at least 15% to 20% equity in your home to be eligible for a HELOC, with some lenders accepting as little as 10% equity. Equity is your home’s current value minus your existing mortgage balance.
- Stable income: You’ll also need to show proof of stable, sufficient income to illustrate that you can afford to take on additional debt.
Interest rates
HELOC interest rates are typically variable. This means your rate and payment can fluctuate based on market conditions. Rates on HELOCs tend to be lower than on personal loans, since they are secured by collateral.
Borrowing limits
How much you can borrow with a HELOC depends on your home’s value and how much you currently have borrowed against it. You can typically borrow up to 80% to 90% of your home’s total value, minus your current mortgage balance, depending on the lender.
Cost difference example
What you’ll pay for a HELOC or personal loan depends on your lender, credit score, and other factors. Here’s an example of what these costs might look like:
| HELOC | Personal loan | |
|---|---|---|
| Initial loan amount/credit line | $40,000 | $40,000 |
| Amount actually withdrawn/used | $20,000 | $40,000 |
| Repayment term | 10-year draw period and 20-year repayment period | 7 years |
| Starting interest rate | 5% | 11% |
| Beginning payments at beginning | $83.33 (interest-only payments during draw period) | $684.90 |
| Interest rate after increases | 9% | N/A (rate is fixed) |
| Payment during repayment period | $179.95 | $684.90 (payment stays the same) |
| Total interest paid | $33,186 | $17,531.39 |
HELOC vs. personal loan FAQs
Whether it’s easier to get a HELOC or personal loan depends on your individual circumstances. On the surface, it might seem easier to get a HELOC compared to a personal loan because it’s secured by your home, which makes a HELOC less risky for a lender.
However, if you have good to excellent credit, getting a personal loan could actually be simpler and faster as you won’t have to go through a home appraisal process like you would with a HELOC.
Both HELOCs and personal loans can be used for almost any purpose. However, HELOCs provide a credit line you can draw from on an as-needed basis over many years — much like a credit card. In comparison, personal loans provide a one-time, lump sum.
No, a HELOC is only an option if you own a home and have built up a good amount of equity. If you don’t own a home, you’ll need to consider a personal loan, credit card, or other type of financing product that doesn’t use a house as collateral.
