A common question people often ask is the difference between HELOC and personal loans. HELOC and personal loans are both financing options for people who need extra cash. When placing a HELOC vs. personal loan, you need to take into consideration how much money you need, the type of risk both loans represent, as well as how your money will be spent.
HELOC gives you the access needed to a credit line and offers tax advantages, while a personal loan is better if you need one-time expenses. Whether you need cash to pay off home renovations or you need a loan to merge high-interest debts, HELOCs and personal loans are good options to consider. However, they are both similar but different in their ways. In this write-up, we will be comparing HELOC vs. personal loans to find out which is better.
What is HELOC?
This is a type of secured loan for homeowners. Your home equity is used as a guarantee that you will repay your entire loan. It is a form of revolving credit, i.e., when you repay a loan completely, you can borrow more up to a maximum limit without reapplying for another loan. HELOC interest rates are variable, and there are no limits on the amount of loan you can take.
However, the common two reasons this loan is taken are either to fund projects that cause an increment in your home value or to federate debts. There are two common types of HELOC: one is added to your mortgage, and the other is a stand-alone financial product.
What is a Personal Loan?
A personal loan is a stipulated sum of money rendered by a lender, such as a credit union, bank, or any other financial institution. There is no limit to what you can get personal loans for. However, you will have to repay the loan with interest on an agreed-upon repayment term. However, personal loans do not require all borrowers to continuously borrow money after paying off old debts. After the repayment of your debts, you will need to reapply for another loan if you need one.
HELOC vs. Personal Loan
As I mentioned earlier, HELOC and personal loans are similar to each other, but they work in different ways. HELOC may be a better option for borrowers who need a considerable amount of money, while personal loans are best for one-time expenses. Some of the differences between HELOC and personal loans are stated in the table below.
| HELOC | Personal Loan | |
| Common types | HELOC/primary mortgage combo. Second mortgage. | Home improvement loans. Secured and unsecured loans. Debt-compounding loans. Retirement savings loans. |
| Where to get | Credit unions. Major banks. Mortgage lenders. | Credit unions. Banks. Alternative lenders. |
| Uses | Major purchases such as funerals, weddings, etc. Debt compounding. Home renovation. Tuition costs. | Tuition fees. Home improvements. Unforeseen expenses. Car purchase. Compounding debts. |
| Typical loan limits | Up to 65% of the home value. | Up to $50,000 based on the lender. |
| Qualification requirements | Current home value. An acceptable credit report and score. Home equity. Ability to pass the mortgage stress test. | Credit report and score. Permanent address. Age of majority. Employment and income proof. |
| Typical interest rates | Ranging from 3% to 10% based on the lender and credit profile. | 10% on average, based on lender and credit profile. |
How to Choose Between a HELOC and a Personal Loan
To know which of these loans are good enough to meet your financial needs, you need to consider the following questions:
Do I have Home Equity?
If you do not own real estate, HELOC is not a good option for you because it would be difficult for you to offer equity as collateral. Instead of going for HEOCL, you can just go for a personal loan, but if you own real estate, confirm that you have enough equity. The required equity for HELOC is at least 20%. Be aware that comprehending equity means your home is on the line if you ever fail to repay the loan.
What are my Goals?
If you need a loan to cover a one-time expense and you are sure that your loan will be less than $50,00, a personal loan is preferable. If you need to cover major expenses and completing them would take a year or two, getting a HELOC is a better option. Because HELOC is a revolving credit, it is easier to use it to cover your expenses.
What Interest rate do I want to Pay?
HELOC is a secured loan, meaning it offers lower interest rates than unsecured personal loans. As long as you have an acceptable credit score, you can go for HELOC. But if you do not have access to collateral, getting an unsecured personal loan is preferable.