If you’re looking for a tool you can use to borrow money when you need it, you may be wondering which is the best choice: a personal line of credit, a personal loan, or a home equity line of credit (HELOC).
In this guide we’ll compare these three types of loans. The two credit lines both function similarly to a credit card but typically have a lower interest rate and a higher credit limit, while a personal loan can provide you with a lump sum of cash that you pay back over a set term. We’ll also cover some of the pros and cons of using a HELOC vs. a personal line of credit vs. a personal loan.
Table of Contents
- What Is a Personal Loan?
- What Is a Personal Line of Credit?
- Can a Personal Loan or a Personal Line of Credit Be Used to Buy a House?
- What Is a HELOC?
- Personal Line of Credit vs HELOC Compared
- Personal Loan vs HELOC Compared
- Personal Line of Credit vs HELOC Compared
- Pros and Cons of HELOCs
- Pros and Cons of Personal Loans
- Pros and Cons of Personal Lines of Credit
- Alternatives to Lines of Credit
- FAQ
Key Points
• A personal line of credit and a HELOC are both flexible borrowing options that allow you to access cash when you want it up to a set amount.
• When it comes to a HELOC vs. a personal line of credit or personal loan, the HELOC will generally have a lower interest rate due to being secured.
• Personal loans typically have fixed interest rates, while HELOCs and personal lines of credit usually have adjustable rates.
• If you have enough home equity, a HELOC could potentially offer you access to more money than a personal loan or line of credit.
• Defaulting on a HELOC puts you at risk for losing your home.
What Is a Personal Loan?
A personal loan is a highly flexible way to borrow a lump sum of money for virtually any reason – from paying medical bills to financing a wedding. You may be able to borrow anywhere from $1,000 to potentially as much as $100,000, typically at a fixed rate, and pay it back in regular monthly installments over a preset period of two to seven or even 10 years. These loans are usually unsecured debt, which means you don’t have to use collateral to qualify. The rate and other terms are determined by the borrower’s credit score, income, debt level, and other factors.
You’ll owe interest from day one on the full amount that you borrow. But if you’re using the loan to make a large purchase, consolidate debt, or pay off one big bill, it may make sense to borrow a specific amount and budget around the predictable monthly payments.
Personal loan rates and fees can vary significantly by lender and borrower. You can use a loan comparison site to check multiple lenders’ rates and terms, or you can go to individual websites to find a match for your goals.
What Is a Personal Line of Credit?
A personal line of credit, sometimes shortened to PLOC, is a revolving credit account that allows you to borrow money as you need it, up to a preset limit.
Instead of borrowing a lump sum and making fixed monthly payments on that amount, as you would with a traditional installment loan, a personal line of credit allows you to draw funds as needed during a predetermined draw period. You’re required to make payments based only on your outstanding balance during the draw period.
In that way, a PLOC works like a credit card. Generally, you can pay as much as you want each month toward your balance, as long as you make at least the minimum payment due. The money you repay is added back to your credit limit, so it’s available for you to use again.
You can use a personal line of credit for just about anything you like as long you stay within your limit, which could range up to $50,000, and possibly more.
Like a personal loan, a PLOC is typically unsecured, so you don’t need collateral. The lender will base decisions about the amount you can borrow and the interest rate you’ll pay on your personal creditworthiness. The interest rates are generally variable.
Can a Personal Loan or a Personal Line of Credit Be Used to Buy a House?
If you could qualify for a high enough credit limit — or if the property you want to buy is being sold at an extremely low price — you might be able to purchase a house with a personal line of credit or a personal loan. But it may not be the best tool available.
A traditional mortgage, secured by the home that’s being purchased, may have lower overall costs than a personal loan or personal line of credit. There are several different types of mortgage loans to choose from.
If you’re looking at a personal loan vs. a personal line of credit or mortgage, it’s also important to realize that a personal loan is usually for a much shorter term than a mortgage, which is typically 30 years, or most PLOCs. And since personal loans, like PLOCs, are unsecured, they typically carry much higher interest rates than traditional mortgages.
A variable rate, which is typical of personal lines of credit, might not be the best option for a large purchase that could take a long time to pay off. Your payments could go lower, but they also could go higher. If interest rates increase, your loan could become unaffordable. With a traditional mortgage, you would have the option of a fixed rate or a variable one.
Another consideration: If you use all or most of your PLOC to make a major purchase like a home, it could have a negative impact on your credit score and future borrowing ability. The amount of revolving credit you’re using vs. how much you have available — your credit utilization ratio — is an important factor that affects your credit score. The rule of thumb is typically to aim for less than 30%.
What Is a HELOC?
A HELOC is a revolving line of credit that is secured by the borrower’s home. It, too, usually has a variable interest rate.
Lenders typically will allow you to use a HELOC to borrow a large percentage of your home’s current value minus the amount you owe. That’s your home equity.
A lender also may review your credit score, credit history, employment history, and debt-to-income ratio (monthly debts / gross monthly income = DTI) when determining your borrowing limit and interest rate.
Recommended: Learn More About How HELOCs Work
Turn your home equity into cash with a HELOC from SoFi.
Access up to 90% or $500k of your home’s equity to finance almost anything.
Personal Line of Credit vs HELOC Compared
If you’re comparing a personal line of credit with a HELOC, you’ll find many similarities. But there are important differences to keep in mind as well.
Personal Loan vs HELOC Compared
If you’re looking at a HELOC vs. a personal loan, you’ll find many ways in which the two are different, but also some ways they’re alike.
Similarities
Here are some shared aspects of a personal loan vs. a home equity line of credit.
• The money that you borrow can be used for virtually any purpose you choose.
• Easy access to your money. A personal loan gives you the money in a lump sum and a HELOC allows you to draw funds at will (up to a set limit) during the draw period.
• You must pay interest on your loan, and rates are typically lower than they would be for credit cards, for instance.
• There are defined periods during which your loan and interest must be repaid in regular installments.
• Lenders may charge a variety of fees, including late or prepayment fees on either. Be sure you know about potential fees before closing.
Differences
There are also many points of difference to take into account when you’re considering a HELOC vs. a personal loan.
• HELOCs are secured by your house, which serves as collateral. Personal pans are typically unsecured. This means that your interest rate is likely to be higher with a personal loan.
• HELOCs are revolving lines of credit and work like credit cards – you use what you need when you need it. A personal loan generally comes as a lump sum.
• Personal loans typically have fixed interest rates, meaning that your monthly payments will always be the same for the length of the loan. HELOCs typically have adjustable rates, meaning that your payments can change with the market as well as with how much you withdraw.
• Personal loans generally have terms of 10 years at most. HELOCs often have a 10-year draw period followed by a 20-year repayment period, for a total of 30 years.
• Lender requirements vary, but you’ll generally need a FICO® score of at least 610 for a personal loan, while for a HELOC, it may be 680. Higher scores are likely to result in better interest rates and possibly higher loan limits.
• Since your home is collateral for a HELOC, you may need to pay for an appraisal to establish how much your home is worth. Depending on your lender, you may also need to pay other closing costs.
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Personal Loan vs. Home Equity Line of Credit |
||
|---|---|---|
| Personal Loan | HELOC | |
| Flexible borrowing and repayment | âś“ | âś“ |
| Convenient access to funds | âś“ | âś“ |
| Annual or monthly maintenance fee | Not typically | Varies by lender |
| Typically a variable interest rate | âś“ | |
| Secured with collateral | âś“ | |
| Approval based on creditworthiness | âś“ | âś“ |
| Favorable interest rates | âś“* | âś“* |
| *Rates for secured loans are usually lower than for unsecured loans. Rates for personal loans are generally lower than credit card rates. | ||
Personal Line of Credit vs HELOC Compared
If you’re comparing a personal line of credit with a HELOC, you’ll find many similarities. But there are important differences to keep in mind as well.
Similarities
Here are some ways in which a personal line of credit and a HELOC are alike:
• Both are revolving credit accounts. Money can be borrowed, repaid, and borrowed again, up to the credit limit.
• Both have a draw period and a repayment period. The draw period is typically 10 years, with monthly minimum payments required. The repayment period may be up to 20 years after the draw period ends.
• Access to funds is convenient. Withdrawals can be made by check or debit card, depending on how the lender sets up the loan.
• Lenders may charge monthly fees, transaction fees, or late or prepayment fees on either. It’s important to understand potential fees before closing.
• Both typically have variable interest rates, which can affect the overall cost of the line of credit over time. (Each occasionally comes with a fixed rate. The starting rate of a fixed-rate HELOC is usually higher. The draw period of a fixed-rate personal line of credit could be relatively short.)
• For both, you’ll usually need a FICO® score of 680. Your credit score also affects the interest rate you’re offered and credit limit.
Differences
The biggest difference when you’re looking at a personal line of credit vs. a home equity line of credit is that a HELOC is secured. That can affect the borrower in a few ways, including:
• In exchange for the risk that HELOC borrowers take (they could lose their home if they were to default on payments), they generally qualify for lower interest rates. HELOC borrowers also may qualify for a higher credit limit.
• With a HELOC, the lender may require a home appraisal, which might slow down the approval process and be an added expense. HELOCs also typically come with other closing costs, but some lenders will reduce or waive them if you keep the loan open for a certain period — usually three years.
• A borrower assumes the risk of losing their home if they default on a HELOC. A personal line of credit does not come with a risk of that significance.
|
Personal Line of Credit vs. Home Equity Line of Credit |
||
|---|---|---|
| Personal LOC | HELOC | |
| Flexible borrowing and repayment | âś“ | âś“ |
| Convenient access to funds | âś“ | âś“ |
| Annual or monthly maintenance fee | Varies by lender | Varies by lender |
| Typically a variable interest rate | âś“ | âś“ |
| Secured with collateral | âś“ | |
| Approval based on creditworthiness | âś“ | âś“ |
| Favorable interest rates | âś“* | âś“* |
| *Rates for secured loans are usually lower than for unsecured loans. Rates for personal loans are generally lower than credit card rates. | ||
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Pros and Cons of HELOCs
A HELOC and personal line of credit share many of the same pros and cons. An advantage of borrowing with a HELOC, however, is that because it’s secured, the interest rate may be more favorable than that of a personal line of credit or a personal loan.
A HELOC may offer a tax benefit if you itemize, spend the funds on buying, building or significantly improving your home, and can take the mortgage interest deduction. But there are potential downsides, too.
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Pros:
• Flexibility in how much you can borrow and when.
• Interest is charged only on the amount borrowed during the draw period.
• Generally, interest rates are lower than those on credit cards or unsecured borrowing.
• Interest paid may be tax deductible if HELOC money is spent to “buy, build, or substantially improve” the property on which the line of credit is based.
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Cons:
• Your home is at risk if you default.
• Variable interest rates can make repayment unpredictable and potentially expensive.
• Lenders may require a current home appraisal for approval.
• A decline in property value could affect the credit limit or result in termination of the HELOC.
Pros and Cons of Personal Loans
A personal loan can be a good choice when you need a lump sum of money – say, for a major purchase or bathroom remodel – especially if it’s not an extremely large amount. You’re likely to get a better interest rate than you would on a credit card, and a shorter repayment term than you’d have for a PLOC or HELOC. But there’s a lot to consider.
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Pros:
• You borrow what you need and can spend it as you wish.
• Interest charges are typically fixed, meaning you always know what your payments will be.
• Interest rates are typically lower than credit cards.
• You aren’t putting your home or another asset at risk if you default.
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Cons:
• Interest rate may be higher than for a secured loan.
• A relatively short repayment term may mean that your monthly payments are higher than you’d like.
• Qualification can be more difficult than for secured credit.
• The debt can have a negative impact on your DTI ratio.
Pros and Cons of Personal Lines of Credit
Because you draw just the amount of money you need at any one time, a personal line of credit can be a good way to pay for home renovations, ongoing medical or dental treatments, or other expenses that might be spread out over time.
You pay interest only on the funds you’ve drawn, not the entire line of credit that’s available, which can keep monthly costs down. As you make payments, the line of credit is replenished, so you can borrow repeatedly during the draw period. And you don’t have to come up with collateral.
But there are other factors to be wary of. Here’s a summary.
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Pros:
• You have flexibility in how much you borrow and when
• Interest charges are based only on what you’ve borrowed.
• Interest rates are typically lower than those on credit cards.
• You aren’t putting your home or another asset at risk if you default.
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Cons:
• Variable interest rates can make repayment unpredictable and potentially expensive.
• Interest rate may be higher than for a secured loan.
• Qualification can be more difficult than for secured credit.
• Convenience and minimum monthly payments could lead to overspending.
Alternatives to Lines of Credit
As you consider the pros and cons of a HELOC vs. a personal LOC or personal loan, you may also wish to evaluate some alternative borrowing strategies, including:
Personal Loan
As you’re thinking about a personal loan vs. a personal line of credit, the big difference is that, with a personal loan, a borrower receives a lump sum and makes fixed monthly payments, with interest, until the loan is repaid.
Most personal loans are unsecured, and most come with a fixed interest rate. The rate and other terms are determined by the borrower’s credit score, income, debt level, and other factors.
You’ll owe interest from day one on the full amount that you borrow. But if you’re using the loan to make a large purchase, consolidate debt, or pay off one big bill, it may make sense to borrow a specific amount and budget around the predictable monthly payments.
Personal loan rates and fees can vary significantly by lender and borrower. You can use a loan comparison site to check multiple lenders’ rates and terms, or you can go to individual websites to find a match for your goals.
Auto Loan
If you’re thinking about buying a car with a personal loan, you may want to consider an auto loan, an installment loan that’s secured by the car being purchased. Qualification may be easier than for an unsecured personal loan or personal line of credit.
Most auto loans have a fixed interest rate that’s based on the applicant’s creditworthiness, the loan amount, and the type of vehicle that’s being purchased.
Down the road, if you think you can get a better interest rate, you can look into car refinancing.
Beware no credit check loans. Car title loans have very short repayment periods and sky-high interest rates.
Mortgage
A mortgage is an installment loan that is secured by the real estate you’re purchasing or refinancing. You’ll likely need a down payment, and borrowers typically pay closing costs of 2% to 5% of the loan amount.
A mortgage may have a fixed or adjustable interest rate. An adjustable-rate mortgage typically starts with a lower interest rate than its fixed-rate counterpart. The most common repayment period, or mortgage term, is 30 years.
Your ability to qualify for the mortgage you want may depend on your creditworthiness, the down payment, and the value of the home.
Credit Cards
A credit card is a revolving line of credit that may be used for day-to-day purchases like groceries, gas, or online shopping. You likely have more than one already. Gen X and baby boomers have an average of about four credit cards per person, Experian® has found, and even Gen Z, the youngest generation, averages two cards per person.
Convenience can be one of the best and worst things about using credit cards. You can use them almost anywhere to pay for almost anything. But it can be easy to accrue debt you can’t repay.
Because most credit cards are unsecured, interest rates can be higher than for other types of borrowing. Making late payments or using a high percentage of your credit limit can hurt your credit score. And making just the minimum payment can cost you in interest and credit score.
If you manage your cards wisely, however, credit card rewards can add up. And you may be able to qualify for a low- or no-interest introductory offer.
Credit card issuers typically base a consumer’s interest rate and credit limit on their credit score, income, and other financial factors.
Student Loans
Federal student loans typically offer lower interest rates and more borrower protections than private student loans or other lending options.
But if your federal financial aid package doesn’t cover all of your education costs, it could be worth comparing what private lenders offer.
Home Equity Loans
If you’re a homeowner with equity in your house and you’re not comfortable with the adjustable payments of a HELOC, you might want to consider a home equity loan. These lump sum loans typically have fixed interest rates, meaning that you’ll know in advance what your payments will be every month and can plan accordingly. And since they’re secured with your home, interest rates are typically lower than they’d be for unsecured loans. Just remember that, as with a HELOC, your home is at risk if you can’t make your payments.
The Takeaway
A HELOC, a personal loan, or a personal line of credit can be useful for a borrower in need of funds. Each kind of loan has different advantages and drawbacks, so it’s important to consider each carefully in light of your financial situation so you can assess what would work best for your needs.
SoFi now partners with Spring EQ to offer flexible HELOCs. Our HELOC options allow you to access up to 90% of your home’s value, or $500,000, at competitively lower rates. And the application process is quick and convenient.
FAQ
What is better, a home equity line of credit or a personal line of credit?
If you qualify for both, a HELOC will almost always come with a lower interest rate. However, it does put your home at risk if you can’t make your payments.
Can I use a HELOC for personal use?
Yes. HELOC withdrawals can be used for almost anything, but the line of credit is best suited for ongoing expenses like home renovations, medical bills, or college expenses. Some people secure a HELOC as a safety net during uncertain times.
How many years do you have to pay off a HELOC?
Most HELOCs have a “draw period” of 10 years, followed by a repayment period, which may be up to 20 years.
What happens if you don’t use your home equity line of credit?
Having a HELOC you don’t use could help your credit score by improving your credit utilization ratio.
How high of a credit score is needed for a line of credit?
Personal lines of credit are usually reserved for borrowers with a credit score of 680 or higher. A credit score of at least 680 is typically needed for HELOC approval, but requirements can vary among lenders. Some may be more lenient if an applicant has a good debt-to-income ratio or accepts a lower loan limit.
Does a HELOC increase your mortgage payments?
The HELOC is a separate loan from your mortgage. The two payments are not made together.
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