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HELOC vs. Personal Loan: Which To Choose?

We’ll help you decide whether a HELOC or personal loan is better for your financial situation.

Author
By Lindsay Frankel
Lindsay Frankel

Written by

Lindsay Frankel

Writer

Lindsay Frankel has been covering personal finance for six years, with particular expertise in loans, insurance, and real estate. She’s written hundreds of articles across a range of well-known outlets, including LendingTree, Investopedia, SFGate, and more. Outside of writing, she enjoys playing music and exploring nature with her rescue dog, Lucy.

Edited by Jared Hughes

Written by

Jared Hughes

Editor

Jared Hughes is a personal loan editor for Credible and Fox Money, and has been producing digital content for more than six years.

Updated February 6, 2024

Editorial disclosure: Our goal is to give you the tools and confidence you need to improve your finances.

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Credible takeaways:

  • A HELOC provides an ongoing credit line with low initial monthly payments and long repayment terms, while a personal loan provides a lump sum with higher fixed monthly payments and shorter repayment periods.
  • HELOCs typically have lower interest rates than personal loans. But you may pay more in interest over time if you make only the minimum payment due.
  • Getting a personal loan is usually quicker than getting a HELOC.

A home equity line of credit (HELOC) lets you borrow against your home equity on an ongoing basis, but it comes with a few downsides, including upfront costs and a longer funding timeline. For these reasons, some people choose a personal loan instead, which has its own benefits and drawbacks. To help you decide between the two, we’ll cover how HELOCs and personal loans work and which option makes the most sense for different situations.

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HELOCs vs. personal loans

Here’s how HELOCs and personal loans stack up against each other.

HELOC
Personal loan
Interest rates
Typically variable
Typically fixed
Loan terms
Often a 10-year draw period followed by a 20-year repayment period, but terms may vary
Often 1 to 7 years, but varies by lender
Loan limits
Depends on the lender, but typically no more than 80% of your home equity
Up to $100,000 or more, but varies by lender, credit profile, and income
Basic eligibility
  • Sufficient home equity
  • Sufficient income
  • A low debt-to-income ratio (DTI)
  • A strong payment history
  • Sufficient income
  • A low DTI
Time to fund
Approximately 2 to 6 weeks, but varies by lender
Between 1 day and 1 week, but varies by lender

How do HELOCs work?

A HELOC works similarly to a credit card. You borrow as much as you need up to your limit, which is determined by your home equity and other factors. You may access the money through special checks or a credit card. As you make payments, your credit limit replenishes. You can continue to borrow repeatedly during the draw period without having to reapply for credit.

Many lenders allow you to make interest-only payments during the draw period. When the draw period ends, you can no longer borrow, and you enter the repayment period. During this time, you’ll make larger monthly payments of both principal (the amount you borrowed) and interest (the cost of borrowing).

Because HELOC interest rates tend to be variable, your payments may vary from month to month. If you don’t pay off the full balance by the end of the term, you may be required to make a lump sum payment known as a balloon payment.

Because HELOCs are secured by your home, you’ll need to get an appraisal and often pay other closing costs to complete your application, similar to getting a mortgage. If you fail to repay a HELOC, the lender can also seize your home through foreclosure. If you’re unsure if a HELOC is right for you or you need help avoiding foreclosure, talk to a Department of Housing and Urban Development-approved housing counselor.

How do personal loans work?

A personal loan provides a lump sum payment upfront, rather than an ongoing credit line. Interest rates on a personal loan are typically fixed, so you’ll repay the loan in predictable monthly payments every month. There’s no draw period, so you’ll begin paying down the principal and interest right away. You can often choose your repayment term, which could be up to seven years, or more in some cases. Loan amounts range from as low as $600 to as high as $100,000 or more.

Personal loans are typically unsecured, meaning they’re not tied to an asset that the lender can take if you fail to repay. For this reason, you may pay a higher interest rate than you would with a HELOC. The average interest rate for a 24-month personal loan was 12.17% as of August 2023, according to the Federal Reserve. Your lender will set your rate based on your credit score and other factors, like your debt-to-income ratio, which is the percentage of your pretax monthly income that goes toward debt payments each month. Most lenders prefer a ratio of 35% or less.

You may also pay an origination fee that is subtracted from the funds you receive, anywhere from 1% to 12%. When selecting a loan, it’s best to compare the annual percentage rate (APR), which indicates the total cost to borrow, and is expressed as a percentage of your loan amount, including upfront fees.

If you miss a payment on a personal loan, the lender may report the missed payment to the three major credit bureaus, which could damage your credit. It’s important to ensure the payments fit into your budget before taking out a personal loan.

You can prequalify for a personal loan without impacting your credit score. However, once you formally apply, the lender will perform a hard credit pull, which will lower your credit score temporarily. Note that prequalification is not an offer of credit, and the final rate you receive may be different.

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4.24.2

Credible rating

Fixed (APR)

7.49% - 25.49%

Loan Amounts

$5000 to $100000

Min. Credit Score

700

on Credible’s website

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3.93.9

Credible rating

Fixed (APR)

7.80% - 35.99%

Loan Amounts

$1000 to $50000

Min. Credit Score

620

on Credible’s website

View Details

4.44.4

Credible rating

Fixed (APR)

-

Loan Amounts

$2500 to $40000

Min. Credit Score

660

on Credible’s website

View Details

4.64.6

Credible rating

Fixed (APR)

8.49% - 17.99%

Loan Amounts

$600 to $50000

Min. Credit Score

760

on Credible’s website

View Details

4.54.5

Credible rating

Fixed (APR)

8.49% - 35.99%

Loan Amounts

$1000 to $50000

Min. Credit Score

600

on Credible’s website

View Details

4.94.9

Credible rating

Fixed (APR)

8.99% - 29.99%

Loan Amounts

$5000 to $100000

Min. Credit Score

Does not disclose

on Credible’s website

View Details

44

Credible rating

Fixed (APR)

8.99% - 35.99%

Loan Amounts

$2000 to $50000

Min. Credit Score

600

on Credible’s website

View Details

44

Credible rating

Fixed (APR)

9.57% - 35.99%

Loan Amounts

$1000 to $40000

Min. Credit Score

660

on Credible’s website

View Details

3.93.9

Credible rating

Fixed (APR)

9.95% - 35.99%

Loan Amounts

$2000 to $35000

Min. Credit Score

550

on Credible’s website

View Details

4.34.3

Credible rating

Fixed (APR)

11.69% - 35.99%

Loan Amounts

$1000 to $50000

Min. Credit Score

560

on Credible’s website

View Details

3.93.9

Credible rating

Fixed (APR)

11.72% - 17.99%

Loan Amounts

$3000 to $40000

Min. Credit Score

640

on Credible’s website

View Details

44

Credible rating

Fixed (APR)

-

Loan Amounts

$20000 to $200000

Min. Credit Score

660

on Credible’s website

View Details

3.73.7

Credible rating

Fixed (APR)

14.30% - 35.99%

Loan Amounts

$3500 to $40000

Min. Credit Score

640

on Credible’s website

View Details

3.93.9

Credible rating

Fixed (APR)

18.00% - 35.99%

Loan Amounts

$1500 to $20000

Min. Credit Score

540

on Credible’s website

View Details

All APRs reflect autopay and loyalty discounts where available | LightStream disclosure | SoFi Disclosures | Read more about Rates and Terms

When does a HELOC make sense?

A HELOC might make sense if you have plenty of equity in your home and need money for ongoing expenses, such as a home improvement or renovation project. Due to closing costs and high minimums, borrowers who need a small loan will likely be better served by a personal loan.

When does a personal loan make sense?

A personal loan is likely a good fit for someone who needs a lump sum of money quickly. For example, an auto repair or emergency veterinarian bill are both potentially good reasons to take out a personal loan. Personal loans are also an option for new homeowners or renters who can’t qualify for a HELOC, and anyone who wants a fixed monthly payment to make budgeting easier.

Check Out: How To Get Approved for a Personal Loan

Alternatives

It’s possible that neither a HELOC nor a personal loan will meet your needs. You may also have trouble meeting the eligibility requirements for both products. If that’s the case, there are a few alternatives you can consider:

  • 401(k) loan: If your retirement plan sponsor allows loans, you may be able to borrow from the vested balance in your 401(k) account. 401(k) loans don’t require a credit check and won’t impact your credit. If you leave your job, however, you may be required to pay the balance at once, and if you fail to repay, you may get hit with a tax penalty.
  • Home equity loan: If a HELOC sounds good but you want the money in a lump sum with predictable monthly payments, you might opt for a home equity loan instead. Similar to a HELOC, these loans are secured by your home, and it can be seized if you default.
  • Personal line of credit: If you want to be able to borrow what you need on an ongoing basis, consider a personal line of credit instead. Like personal loans, a personal line of credit is usually unsecured, but they typically have variable rates. Personal lines of credit generally have a dedicated draw period and a continuous repayment period, depending on the lender.
  • Credit card: If you’re planning to make a large purchase and you can afford to pay it off within the grace period, a credit card could be an option. Some credit card issuers offer 0% APR for up to 21 months on a new credit card, which gives you time to repay the balance without worrying about interest. If you can’t pay off that balance by the end of the promotional period, however, the standard APR resumes. Credit cards have variable rates, with the average interest rate at 21.19% as of August 2023, according to the Federal Reserve.
  • Cash advance app: If you just need a few hundred dollars ahead of payday and you have bad credit, consider using a cash advance app. These apps are repaid by your next check and don’t typically charge interest. Optional tips and fees may apply, though. Dave and EarnIn are two potential options.

HELOC vs. personal loan FAQ

Are HELOC rates lower than personal loan rates?

While your interest rate on a HELOC or personal loan will depend on many factors, including the loan amount and your credit profile, HELOCs tend to have lower interest rates than personal loans. That’s because HELOCs are secured by your home. Secured loans are less risky to lenders because they can take your collateral if you fail to repay.

What is the cost of a HELOC vs. a personal loan?

It’s difficult to compare a HELOC and a personal loan apples-to-apples. HELOCs tend to have lower interest rates but much longer repayment terms. That means you’ll likely have a lower monthly payment with a HELOC, and could have a lower rate as well. But because of the longer repayment term, you could pay much more in interest over time.

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Meet the expert:
Lindsay Frankel
Lindsay Frankel

Lindsay Frankel has been covering personal finance for six years, with particular expertise in loans, insurance, and real estate. She’s written hundreds of articles across a range of well-known outlets, including LendingTree, Investopedia, SFGate, and more. Outside of writing, she enjoys playing music and exploring nature with her rescue dog, Lucy.