HELOC vs. Personal Loan: What’s the Difference?

What Is a HELOC?

A HELOC is a revolving line of credit or second mortgage that uses your home as collateral. You usually need at least 15% to 20% equity to qualify. Your home's appraised value helps to determine how much you can borrow; your creditworthiness is also a factor. Typically, you can borrow up to 85% of your home equity.

Example: If you have $100,000 in equity in your home, you might qualify for a HELOC of up to $85,000.

HELOCs generally have an initial five- to 10-year draw period. During this time, you can borrow against your credit limit and make interest-only payments on what you borrow. When the draw period ends, you repay the loan plus interest, usually over 20 years. Some HELOCs have a balloon payment, meaning the full amount borrowed must be paid immediately after the draw period ends.

Learn more: How Does HELOC Repayment Work?

Pros and Cons of a HELOC

HELOCs come with both benefits and disadvantages to consider.

Learn more: Is a HELOC a Good Idea?

What Is a Personal Loan?

Personal loans are installment loans that you receive as a lump sum and repay in fixed monthly installments. Repayment terms usually range from one to seven years. Most personal loans are unsecured, so your creditworthiness largely determines your loan amount and interest rate. Whether secured or unsecured, personal loans usually have higher interest rates than HELOCs but lower interest rates than credit cards.

Personal loan amounts generally range from $1,000 to $50,000, but some lenders offer personal loans for $100,000 or more. You can typically use personal loans for any purpose, including emergency expenses, medical bills, consolidating high-interest debts or making home improvements.

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Pros and Cons of a Personal Loan

Before applying for a personal loan, be aware of their upsides and downsides.

Learn more: Personal Loan Requirements to Know Before You Apply

HELOC vs. Personal Loan

Both HELOCs and personal loans can help you finance major expenses, but there are some important differences between them.

A HELOC offers flexible borrowing options with a lengthy repayment timeline, while a personal loan provides a lump-sum payout and a short repayment term. HELOCs typically charge closing costs, have variable interest rates and take longer to fund than personal loans. Most personal loans have fixed interest rates and funds are usually issued within a week of loan approval.

The biggest difference between HELOCs and personal loans is that HELOCs are secured by your home equity. If you fail to make payments, you could lose your home. Personal loans usually don't require collateral, making them accessible to more people and reducing the borrower's risk.

Tip: Use an APR calculator to easily compare the costs of different loans.

Should You Get a HELOC or a Personal Loan?

Whether to get a HELOC or a personal loan depends on your financial situation, your plans for the loan and other factors. You may even find that an alternative option is better for your needs.

When to Get a HELOC

It could be best to get a HELOC if:

• You have ample home equity. This gives you more wiggle room to borrow what you need without sacrificing too much of your hard-built equity.
• You intend to make home improvements. Interest on the HELOC could be tax deductible if the funds are used to "substantially improve" your home.
• You're planning a long-term project. Major home improvements are often completed in stages, and you may not know exactly how much you need when you start out. A HELOC lets you draw money as needed and only pay for what you've borrowed.
• You prefer a longer repayment term. Be sure you understand the loan terms and can budget for larger payments when the draw period is over. Otherwise, you risk losing your home.

Tip: Using a HELOC to prep your home for sale could help you command a higher price. You can then use proceeds from the sale to pay off the HELOC.

Learn more: How to Get a HELOC

When to Get a Personal Loan

A personal loan might make more sense if:

• You need to fund a one-time expense. If you need a specific amount of money all at once, a personal loan may be a better fit.
• You want to consolidate debt. Interest rates are usually much lower for personal loans than credit cards, making them a popular option for paying off high-interest credit card debt.
• You have good credit. You'll need good credit to qualify for the lowest interest rates on an unsecured personal loan.
• You don't want to use your home as collateral. Failing to repay a personal loan will damage your credit score, but won't cost you your home.

Learn more: How to Get a Personal Loan: A Step-by-Step Guide

Alternatives to HELOCs and Personal Loans

Other loans could be better options than a HELOC or personal loan depending on your situation.

• Credit cards: Some cards offer new cardholders introductory 0% interest rates on purchases or balance transfers, often for 12 to 21 months. This allows you to make a large purchase or pay off high-interest credit card balances and accrue no interest during the promotional period.
• Personal line of credit: Like a HELOC, a personal line of credit allows you to draw money as needed and only pay interest when you borrow money. However, it's unsecured, so you don't need home equity to qualify and you won't risk losing your home.
• Cash-out refinancing: With a cash-out refi, you'll refinance your mortgage with a larger loan and keep the difference in cash. Ideally, you'll also lower your mortgage's interest rate in the process.

Learn more: Pros and Cons of a Cash-Out Refinance

The Bottom Line

Whether you're looking for a HELOC, personal loan or other form of financing, your credit score plays a major role in determining your eligibility and interest rate. Improving your score before applying for a loan may help you get more favorable terms. Check your FICO^® Score^Θ for free with Experian and you'll get insights into which factors most impact on your score.