HELOC vs. Personal Loan: Which Is Best for You?

If you're a homeowner who needs to borrow money or consolidate debt, a home equity line of credit (HELOC) or a personal loan may be the right solution. A HELOC lets you borrow against your home equity for a period of time, while an unsecured personal loan provides an upfront lump sum with no collateral needed. Both products have advantages, but the right one for you depends on your personal situation. 

Below, learn how HELOCs and personal loans work, how they’re different, and when each is the better choice.

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HELOC vs. personal loan overview

While personal loans and HELOCs can serve similar purposes, they work in different ways. 

How personal loans work

Personal loans are a type of installment loan. After receiving your loan in a lump sum, you begin making fixed monthly payments to repay the loan, plus interest and any fees, over a set period of time.

Most personal loans are unsecured, meaning they don’t require collateral. While an unsecured loan can reduce your risk as a borrower, it means you might pay a higher interest rate compared to a secured loan. Interest rates on personal loans are typically fixed and range from around 7% to 36%. 

With a personal loan, you can borrow anywhere from a few thousand dollars to $100,000 or more, depending on the lender and your qualifications. Typical repayment terms range from two to seven years. Your loan amount, interest rate, and repayment period determine your monthly payment and the overall cost of your loan. Meanwhile, your credit history and financial situation affect the interest rate you’ll qualify for.

How HELOCs work

Home equity lines of credit allow you to borrow against the equity you have in your house. Similar to a credit card, HELOCs let you borrow money on an ongoing basis during what’s called the draw period, which typically lasts 5 to 10 years. 

Unlike a personal loan, you borrow on an as-needed basis (up to your limit) and repay what you use, plus interest and fees. Typically, you can access your HELOC funds with checks, online withdrawals, or a credit card connected to your account. During the draw period, you might only be required to pay interest on the amount you borrow.

Once the draw period ends, the repayment period begins, which typically lasts around 10 to 20 years. If you don’t make your HELOC payments during this time, you risk losing your home to foreclosure.

HELOCs typically have variable interest rates, which means your payments can fluctuate unpredictably. But because HELOCs are secured by your home, rates tend to be lower than personal loan interest rates.

Similarities and differences of personal loans and HELOCs

The chart below shows some of the major similarities and differences between personal loans and HELOCs, and is followed by further details:

Similarities of personal loans and HELOCs

Personal loans and HELOCs are similar in a few key ways:

• Purpose: Both HELOCs and personal loans can serve a variety of financial purposes, such as funding home improvements, covering emergency expenses, or consolidating debt.
• Amount: Though borrowing limits are calculated differently, HELOCs and personal loans can allow you to borrow tens of thousands of dollars.
• Interest and fees: Both personal loans and HELOCs charge interest, which you have to pay in addition to the amount you borrow. You may also have to pay fees, such as origination fees, for both. 

Differences between personal loans and HELOCs

Despite their similarities, personal loans and HELOCs have some major differences to be aware of:

• Funds disbursement: With a personal loan, you receive your loan funds upfront in a single lump sum. With a HELOC, you can borrow however much you need on an ongoing basis, up to your credit limit.
• Collateral: While a HELOC is secured by your house, personal loans often don’t require any collateral.
• Term: Personal loan terms generally range from 2 to 7 years. HELOCs often have a draw period of around 10 years and a repayment period of 10 to 20 years. 
• Interest rates: Personal loans usually have fixed interest rates. HELOCs often have variable rates that are lower than personal loan rates.
• Funding time: Personal loan lenders can fund loans quickly, often in a matter of days. HELOCs have longer funding timelines because they typically require a home appraisal. It may take several weeks to get your HELOC from the time you submit an application.
• Eligibility: To qualify for a HELOC or personal loan, you may also need to meet certain credit score, income, and debt-to-income ratio (DTI) requirements, which vary by lender and loan type. But for a HELOC, you’ll also need to have built up some equity in your home — usually at least 15% to 20%. 
• Additional charges: Unlike personal loans, HELOCs may also involve home appraisal fees and closing costs.

Impact of personal loans and HELOCs on credit

Personal loans and HELOCs can both impact your credit — and therefore, your ability to borrow money in the future. 

Your payment history has the biggest impact on your FICO score, accounting for 35% of your overall score. With a personal loan, you’ll begin making loan payments immediately. Consistently making on-time payments can help your score improve over time, while missing payments will hurt it. When your HELOC’s repayment period begins, the same principle applies. 

Applying for a personal loan or HELOC typically involves a hard credit inquiry, which can temporarily lower your credit score by a few points. Lastly, both personal loans and HELOCs may add to your credit mix, which could improve your score if you have a limited mix of credit. 

How to choose between a HELOC and a personal loan

Here are some examples of when one option may make more sense than the other.

Scenarios when a personal loan makes more sense

According to Barbara Quan, AFC, founder and empowerment specialist at Moneyology, personal loans can be better for purchases you can pay off in 2 to 3 years. Meanwhile, “A HELOC’s term can be 15 to 30 years, and unless you have the financial discipline to pay it off sooner, more interest will be charged [over the long term].” 

Other scenarios where a personal loan may be a better option include:

• You need money fast and can’t afford to wait several weeks for funding.
• You either don’t own a home or haven’t built up enough home equity yet.
• You have excellent credit and can qualify for a lender’s lowest interest rate.

Personal loan pros and cons

Scenarios when HELOCs make more sense

“[A HELOC] is best when you have a major, phased project like remodeling your kitchen, replacing an aging roof, or even consolidating multiple high-interest debts,” says Michael Brennan, president at Nationwide Mortgage Bankers. “Plus, with a HELOC, you only borrow as needed. If your contractor does the work in waves, you do not pay interest on the full amount right away.”

Other times a HELOC may make sense, include:

• If you have at least 15% to 20% equity in your home. 
• If you want an interest rate lower than a personal loan.
• If you don’t know exactly how much you need to borrow.
• If you prefer a HELOC to a credit card for emergency or unexpected expenses.

HELOC pros and cons

Alternative funding options to consider

If neither a personal loan nor HELOC is the right funding option for you, consider these alternatives: 

Home equity loan

Like a personal loan, a home equity loan is a type of installment loan. But like a HELOC, it’s secured by your home. It can offer fixed, predictable payments and, potentially, a lower interest rate. However, a default means your home could be at risk of foreclosure.

Credit cards

Credit cards may be a convenient option, but only if you can avoid high interest rates. The average interest rate on credit cards was 21.16%, according to the Federal Reserve. If you pay off your balance in full every month, you can avoid interest charges. The same is true if you can qualify for a 0% APR introductory offer and pay off your balance before the card's standard rate takes effect. To qualify for a 0% APR offer, you typically need good credit.

Personal line of credit

A PLOC, or personal line of credit, is similar to a HELOC, but it’s unsecured. Personal lines of credit have a credit limit you can typically access with checks, a debit-like card, a transfer to your checking account, or at a branch office. Like a credit card, you receive a monthly bill and must make at least a minimum payment. However, you'll likely need good credit to qualify, rates are typically variable rather than fixed, and some PLOCs charge transaction fees.

Cash-out refinance 

A cash-out refinance involves replacing your current mortgage with a larger loan. For example, if you owe $100,000 on your mortgage, you might take out a $150,000 loan, pay off your $100,000 mortgage, and pocket the remaining $50,000. Depending on the circumstances, you may even be able to qualify for a lower-rate loan. At the same time, a cash-out refinance would likely involve closing costs.