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

It's more than just variable vs. fixed interest rates

Two people reviewing paperwork at home
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There are a few differences between a home equity line of credit (HELOC) and a personal loan, but the main ones are the interest rates and the use of collateral to back the loans. A HELOC requires a home as collateral; a personal loan typically requires no collateral at all. Further  differences include repayment terms, available loan amounts, fees, and possible tax incentives.

What’s the Difference Between a HELOC and a Personal Loan?

The main difference between a HELOC and a personal loan is the collateral the financial institution will require for the loan. HELOCs use the borrower’s home as backup in case the borrower defaults.

Personal loans often don’t need collateral, and this fact affects the way the two loan types are structured, including interest rates, repayment terms, loan amounts, and fees charged. This variance also can determine whether the borrower qualifies for certain tax incentives.

HELOC Personal Loan
Interest Rate Variable rate Fixed rate
Collateral Home None
Available Loan Amounts Usually $10,000 to a maximum amount set by how much equity you have in your home.  Usually $1,000 to $100,000
Repayment Terms  10-year draw period and 20- to 25-year repayment period 12 to 60 months
Fees  Commonly appraisal and application fees, upfront charges including points, and closing costs Origination and possibly documentation fees
Tax Incentives Possibly tax-deductible when used for qualifying home improvements None
Credit Risk for Default Loss of home and damaged credit Damaged credit

Interest Rate

Interest rates for HELOCs versus personal loans are one of the most noticeable differences between the two financial products. HELOCs have variable interest rates, while personal loans offer fixed rates. This means the interest rates on a HELOC can and likely will rise as prime rates increase. Although most financial institutions have a cap on the interest rate for HELOCs, it’s ultimately up to the lender to decide.

Some lenders may offer a fixed-rate option for all or part of the outstanding balance owed on a HELOC. You should inquire about this option, which could prevent rising interest rates from increasing your monthly payments.

Collateral

The most impactful difference between a HELOC and a personal loan is the collateral required. A HELOC assigns the borrower's home as collateral, but most personal loans require no collateral. Some larger personal loans may mandate some type of collateral, such as a car or savings account, but that’s rare.

Available Loan Amounts

Because a HELOC is based on the equity in the borrower's home, this type of loan allows for larger borrowing limits than personal loans. Most lenders have a maximum percentage of the home value they are willing to make available.

HELOCs typically range from 75% to 85% of the home’s value, minus whatever balance is owed, making it possible to have access to hundreds of thousands of dollars.

For example, if a house is valued at $600,000, the lender may decide to offer 75% of the value, or $450,000. The lender would then subtract the remaining balance the homeowner owes on the house. In this case, let’s say the homeowner still owes $300,000. If the homeowner is approved, the lender would issue a HELOC for $150,000.

Similar to a credit card, HELOC withdrawals can be made in increments and taken at any time throughout the draw period, which is usually 10 years. Personal loans are taken in one lump sum, and typically grant lower amounts than HELOCs. Personal loans can be for any amount, but most often range between $1,000 and $100,000.

Repayment Terms

As mentioned, HELOCs are structured like a revolving credit line. The borrower is only required to repay the interest on the amount borrowed during the draw period—usually 10 years—instead of on the entire available credit amount. Much like a credit card, HELOC payments must be made monthly, until the total balance is paid off or until the end of the draw period.

After the draw period ends, the borrower can no longer withdraw funds, and they will be responsible for making payments on the balance that remains. HELOC payments that formerly included only interest will be amortized and include interest as well as the principal balance. Borrowers will continue to make payments until the repayment period ends, typically 20 years.

Personal loans, on the other hand, are fairly straightforward and are repaid in equal installments shortly after the lump sum is disbursed, often in two to five years. Personal loan payments are made on the account until the entire balance is paid off.

Taxes

One benefit HELOC borrowers find helpful is the tax incentives offered for some uses. Borrowers who withdraw HELOC funds for a home purchase or home improvement may be able to deduct the interest payments on their tax returns. However, the HELOC must be secured by a primary residence to qualify.

Because personal loans are unsecured and considered to be for non-business use, they don’t qualify for the IRS deduction allotted to some HELOCs, even when used toward purchasing a home.

Fees

Loan fees can be a concern for any borrower looking to keep costs under control. Although some major banks offer HELOCs with no closing costs, such a loan’s likely administrative costs are a borrowing expense to consider. HELOC fees can comprise origination costs, title fees, and the cost of appraising the home.

Personal loans usually have fewer fees than HELOCs, but origination costs are common. Any origination fees are set upfront and calculated into the loan balance. Some personal loans penalize borrowers for paying balances off early; however, most do not.

Credit Impact

Both HELOCs and personal loans typically are reported to one or more of the three major credit bureaus when obtained, and missed payments can negatively impact credit scores with either type of loan. As discussed, personal loans are unsecured, so non-payment primarily will result in damaged credit.

The stakes are higher for HELOC borrowers who don’t meet repayment terms than for personal loan borrowers. Falling behind on HELOC payments could result in the loss of their homes, as well as damaged credit scores.

Which Is Right for You?

HELOC and personal loans both have pros and cons, but which suits you best will depend on the amount of money needed and the purpose of the loan.

For those seeking a small sum, a personal loan can mean less paperwork and be easier to qualify for. If you’re a potential borrower with home equity who wants a larger amount of money, you may be better off opting for a HELOC.

HELOCs work best for people who:

  • Have equity in their homes
  • Want flexibility in loan withdrawal amounts
  • Don’t mind a loan with a variable interest rate
  • Need larger amounts for a home purchase or home improvement
  • Don’t necessarily need funds now, but would like an additional line of credit in case of emergencies

Personal loans may be the best option for people who:

  • Are looking for a lump-sum disbursement
  • Want a simple application process
  • Want a fixed-rate installment loan with payments that stay the same every month
  • Need a significant loan but don’t own a home or have enough equity for collateral
  • Seek a relatively small loan of a few thousand dollars

The Bottom Line

The main differences between HELOCs and personal loans are the collateral required and the interest rates you’ll have in repayment.

While HELOCs offer homeowners a way to access equity whenever they need it, the variable rate could mean rising monthly payments and a tighter budget in the future.

Despite the appeal of a personal loan’s fixed interest rate, borrowers could be locked into a higher rate upfront, with loan terms that strain their budgets.

Regardless, it’s crucial to shop around and review the loan terms that work best for your situation.

Frequently Asked Questions (FAQs)

What is a benefit of obtaining a personal loan?

One of the best benefits of personal loans is their flexibility. Their lack of restriction gives borrowers the freedom to use the funds in the way they need—whether for starting a business, paying for a wedding, or consolidating debt—usually without committing collateral.

Are there closing costs on a home equity line of credit?

A few banks offer HELOCs without closing costs, but it’s more common for this form of financing to include origination costs such as title and attorney fees, mortgage filing fees, and the cost of appraising the home.

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