HELOC vs Personal Loan: How to Choose

There's an expense in front of you. Maybe it's the kitchen renovation quote, maybe it's the credit card balance you want gone. You keep landing on the same two options: a HELOC or a personal loan.

Almost everything you read says the HELOC wins automatically because the rate is lower. But that's not actually a guarantee. Plus, a HELOC is tied to your home in a way a personal loan usually isn't, so it's worth making sure you're really getting a deal before you put your home on the line.

Before choosing a HELOC over a personal loan, you need to weigh the real cost of both options—and how much savings is worth the risk.

HELOCs vs personal loans: How they work

The fundamental difference is the shape of the money. A HELOC is a revolving line of credit you borrow against as needed. A personal loan is a one-time installment loan you take as a lump sum and pay back on a fixed schedule. Almost every other difference between them follows from that split.

How a HELOC works

A HELOC, or home equity line of credit, lets you borrow against your home equity—the share of your home you actually own. It’s current value minus what you still owe on the mortgage. Your home secures the loan, and how much you can borrow depends on your equity. 

Lenders usually allow total borrowing against 80% to 90% of your home's value, so you generally keep 10% to 20% equity. This total borrowing vs home value is called your combined loan-to-value, or CLTV.

HELOCs run in two phases: 

• During the draw period, commonly the first five to 10 years, you can borrow up to your limit, pay it down, and borrow again. Many lenders allow interest-only payments during this phase.
• When the draw period ends, the repayment period begins. That’s the remainder of the loan term (often 10 to 20 years). You pay back principal plus interest. Your payment can jump significantly when the repayment period starts.

The rate on a HELOC is usually variable, so it can move over the life of the loan. Some lenders offer fixed-rate HELOCs, and others let you fix your rate during repayment.

How a personal loan works

A personal loan delivers a lump-sum amount at closing, and you repay it in equal monthly installments over a set term, typically two to seven years. The rate is usually fixed, so the payment stays the same from the first month to the last. 

Most personal loans are unsecured, so no asset backs the loan. How much you can borrow is based on your credit, income, and existing debts. If you fall behind, your credit takes the hit and you could be sued, but the lender can’t directly foreclose on your home. 

With no home appraisal to schedule, funding is usually faster too, often within a week of approval, where a HELOC can take longer.

HELOC vs personal loan at a glance

The rate reality for HELOCs and personal loans

Let’s start with the claim you've probably already heard: HELOCs have lower rates. This is often true—but often isn’t always.

A HELOC's rate is often lower because it's secured by your home, and that part is real. But personal loan and home equity rates both span wide ranges, and those ranges overlap. A strong personal loan offer can come in under a high-end HELOC rate. 

Moreover, a HELOC with high closing costs could wind up more expensive than a personal loan with no origination fee, or vice versa. Which method is cheaper depends on your credit, your lender, and the day you apply—not on the product name.

How to compare total borrowing costs, not just interest

The headline rate doesn't tell you what a loan really costs. Fees do a lot of the work, and the two loans carry different ones:

• HELOC closing costs run typically 0% to 5% of the amount. Some lenders charge nothing, while others fold in appraisal, application, title, and recording fees, plus sometimes annual or early-closure fees. Some HELOCs also charge ongoing maintenance or withdrawal fees that could add to the cost.
• Personal loan origination fees range from 0% to 12% of the loan amount. Some lenders charge none. When a fee applies, it's usually deducted from your disbursement.

It’s not as simple as comparing the APR (annual percentage rate) across the two products, either. For one thing, the repayment terms are probably very different. Plus, HELOC closing costs aren’t usually included in the APR. 

How you use the funds could also impact overall costs. HELOC interest could be deductible, but only if you use the funds to buy, build, or substantially improve the home that secures the loan, and only if you itemize. Personal loan interest is normally not deductible regardless of how it’s used. (Consult a tax advisor for your situation.)

The fix: Add up the total cost of borrowing. Include the interest, plus fees, plus any closing costs, minus any tax benefit. Compare these numbers, as well as how the payments fit your budget.

Is a HELOC or personal loan better for you?

The best choice depends on your goals, budget, and situation. Here's how the decision usually breaks down.

A HELOC tends to fit when:

• You have ample equity, so you can borrow without drying up your stake in the home.
• The cost is ongoing or phased, like a staged renovation where you draw as each bill comes due and pay interest only on what you use.
• You want a possibly lower rate and your budget can absorb a variable payment that moves over time.
• You’re comfortable using your home as collateral.

A personal loan tends to fit when:

• You have little or no equity to borrow against.
• You want funds fast, since no appraisal means money in days, not weeks.
• You want fixed, predictable payments.
• You don’t want to risk your home.

Debt consolidation is one of the most common reasons people weigh these two. To roll high-interest credit card balances into one payment, a personal loan gives you speed with no collateral. A HELOC might offer a lower rate if you have the equity and accept the risk.

Bills Action Plan

1. Write down the exact amount you need and whether it's one lump sum or a cost that arrives in stages. That one answer could point you toward a personal loan or a HELOC.
2. Decide how much collateral risk you're willing to carry. If you’re not comfortable putting your home on the line, lean toward a personal loan.
3. Pull real quotes for both. Get a few quotes for HELOCs and personal loans using prequalification with a soft inquiry that doesn't affect your credit score. Then compare the total cost, not just the headline rate.

Key Terms

CLTV (combined loan-to-value): All loans on your home divided by its value. Lenders usually cap it at 80% to 90%.

Secured vs. unsecured: Secured debt is backed by an asset or something valuable you own, like your home or vehicle. Unsecured debt isn't tied to any assets.

APR (annual percentage rate): The yearly cost of credit including some fees. Which fees get included depends on the loan type. HELOC APRs don’t include closing costs, while personal loans APRs do include origination fees.

This content is for general educational purposes. Bills.com is not a lender. Rates, terms, and eligibility vary by lender and are subject to credit approval. Tax deductibility of home equity interest depends on how loan proceeds are used, so consult a qualified tax advisor for advice specific to your situation.