HELOC vs. Personal Loan: Which Is Better?

Personal loans don’t use your home as collateral, but they come with higher interest rates, shorter terms, and higher payments. Home equity lines of credit (HELOCs) use the equity in your home as security on the loan in exchange for lower rates, longer terms, and lower payments. 

Choosing between a HELOC vs. personal loan comes down to one major question: Do you want to put your home up as collateral in exchange for cheaper financing? Here’s what to consider when make this decision.

HELOC vs. personal loans: key differences

When you’re looking at a HELOC and a personal loan side by side, you can see how they differ in terms of loan details. 

	HELOC	Personal loan
Interest rates	Lower, often variable	Higher, often fixed
Eligibility	Must have sufficient equity to qualify	Must qualify with a lender, which depends on your credit report, income, debt, and loan amount
Fees	May need to pay closing costs (but some lenders charge minimal closing costs on a HELOC)	May have a high origination fee (but not all lenders charge this)
Repayment terms	Revolving loan, draw period is often followed by a repayment period	Installment loans range from 6 months to 15 years
Loan amount	Higher (depending on equity)	Often lower than a HELOC
Monthly payment	Lower during the draw period; might be higher during repayment period	Principal and interest payments fixed for the life of the loan
Secured loan?	✅	❌
Loan distribution	Withdraw money as you need it	Get a lump sum upfront

How does a home equity loan work? 

A home equity line of credit (HELOC) is a loan that acts like a line of credit. The amount of equity you have in your home secures the loan. By providing your home as collateral, you can qualify for a lower interest rate on the loan than with many other types of debt, including personal loans. It’s a flexible loan: You’re approved up to a specific amount and can make withdrawals when you need funds.  

A HELOC has a draw period where you can withdraw the money you need and make minimum (often interest-only) payments. This is followed by a repayment period, where you can no longer draw from the credit line. You’ll often make full principal and interest payments each month. 

A HELOC is a powerful financing tool, but it puts your home at risk if you can’t make the monthly payments. You may choose to apply for a HELOC if you’re looking for a lower rate or lower payment, and you’re confident you’ll never miss a payment.

It’s wise to consider the pros and cons of any financial decision. Here are the pros and cons of a HELOC:

Pros

• Lower annual percentage rate (APR) than a personal loan

• Longer repayment period

• Lower payment

• Larger loan amounts possible

Cons

• Home is used as collateral

• APR is often variable 

• Foreclosure risk 

• May need to pay closing costs

How does a personal loan work?

A personal loan is an installment loan you can use for a wide variety of purposes, such as a wedding, vacation, medical expense, debt consolidation, or home improvement. The APR is fixed in most cases, and the loan is disbursed upfront.

You can get a personal loan from many lending institutions, such as banks, credit unions, and online lenders. 

You might choose a personal loan for the flexibility. And compared with a HELOC or home equity loan, your home isn’t on the line if you have trouble making payments. However, because there’s no collateral, the lender charges a higher APR to compensate for the higher risk they’re taking on.    

Here are the pros and cons of a personal loan:

Pros

• Flexible use

• APR is often fixed

• No collateral required

Cons

• High APRs

• Higher monthly payments

• May have a high origination fee

Comparing and contrasting the two might help you decide which makes the most sense.

How to decide between a HELOC and personal loan

Choosing between a HELOC vs. a personal loan comes down to what you value most. Do you want a low interest rate, flexible line of credit, and longer repayment term of a HELOC? Are you willing to accept the risk of foreclosure on your home if you fail to make payments?

Our expert’s take

Erin Kinkade

CFP®

A HELOC is often better for individuals who don’t need a lump sum upfront and may not need the entire amount they are approved for—and, therefore, aren’t required to pay back the entire approval amount. A HELOC is more favorable during low-interest-rate environments and for those who have the flexibility in their budget for variable-rate payments (specifically increased interest rates) on a HELOC. A personal loan may be best for those who need a lump sum upfront, prefer a fixed payment plan (and even more so when interest rates are low!), and don’t want to collateralize their home or don’t own a home. 

Consider what you want out of a loan:

If you…	HELOC or personal loan?
Have enough equity in your home to lend against	HELOC
Need a larger loan amount	HELOC
Want a lower interest rate	HELOC
Want a lower monthly payment for the first several years	HELOC
Want flexibility in borrowing and repaying the loan	HELOC
Want a shorter term	Personal loan
Want a predictable, fixed payment plan	Personal loan
Don’t have enough equity for a HELOC	Personal loan
Don’t want to use your home as collateral	Personal loan

If you’re comfortable putting your home up as collateral to secure a HELOC, you’ll find lower APRs and, in many cases, lower monthly payments during the draw period. If you don’t have enough home equity to qualify for a HELOC or don’t want to use your home as collateral on a loan, a personal loan is the direction to go. 

Long-term effects of HELOC vs. personal loan

If you’re curious about how each loan affects your finances, take a look at the long-term effects.  

Available cash 

One of the biggest impacts you’ll see on your finances is how much free cash you’ll have each month. A HELOC offers a much longer repayment term, so depending on the amount of the loan, the monthly payment might be lower if you make interest-only payments during the draw period. 

If so, you’ll have more free cash available. With a personal loan, you’ll have a higher APR and a shorter repayment period, which might result in a higher monthly payment.

Payoff period

If you follow the repayment plan, you’ll pay off the personal loan much faster. A repayment period for a HELOC can be as long as 20 years—and that’s after the draw period (often five to 10 years) ends. 

Tax consequences

The interest on a HELOC could be tax-deductible if you use it “to buy, build, or substantially improve” your home. A personal loan has no such benefits. 

Future lending

Both can affect other financing you may need. If you need to buy a new car, for example, you may qualify for a lower amount based on the extended to you through a personal loan or a HELOC. 

Credit score

A personal loan is an installment loan, and on-time payments can boost your credit score over time. A HELOC acts like a line of credit, but it shows up as a mortgage on your credit report and doesn’t affect your credit utilization ratio. Making regular payments on your HELOC can also raise your credit score. 

FAQ

Can I take out a personal loan and a HELOC at the same time?

It is possible to have a personal loan and a HELOC at the same time. However, we don’t recommend applying for both at the same time. It could affect your chances of approval if a loan underwriter questions why you’re applying for a loan at the same time as a HELOC.

How does either option affeact my credit score?

A personal loan acts like an installment loan on your credit score. When you make on-time payments every month, you’ll have a positive credit history, and it’s likely your score will go up. If you fail to make payments, your score will go down. A HELOC falls into the category of mortgage loans on your credit history and can build your credit as you make on-time payments. 

Are there any restrictions on how I can use the funds from a HELOC or personal loan?

Both HELOCs and personal loans are flexible in terms of use, but lenders might ask for the purpose of the loan at application and that you use it for the intended purpose. 

How does the economic environment affect personal loan and HELOC rates and terms?

Like most financial products, personal loans and HELOC rates rise with the increase of the federal funds rate and lower as if it falls. HELOCs, which are often variable-rate loans, can change with current conditions of the economic environment. If you lock in a fixed rate on your loan or line of credit, the economic environment after that won’t affect your APR.