HELOC vs Personal Loan: Which One is Right for Your Next Big Project?
Big projects often come with big costs that not everyone can afford. Luckily, there are countless borrowing options out there, like HELOCs and personal loans. Each has its pros, cons, and most practical uses that must be considered before borrowing. We’ll compare the two options below.
What is a HELOC?
A home equity line of credit, or HELOC, allows homeowners to borrow against their home’s equity. Home equity is the value of your home minus the amount you owe on your mortgage. Draw periods for HELOCs usually last about 10 years, while repayment periods can last up to 20 years. As you repay a HELOC’s balance, the amount of available credit is replenished. That said, you must have home equity to apply for a HELOC. Creditors will look at your credit score, employment history, and other financial records before an application is accepted.
What is a HELOC?
HELOCs can be used for just about everything, from home renovations to debt consolidation. That said, HELOCs can be used to increase your home’s value or improve your credit score. You can borrow as much, or as little, as you want up to your credit limit. Plus, HELOCs often provide better borrowing rates than personal loans.
Cons
HELOCs by design work against your home’s equity, which means your home could foreclose if you can’t repay the line of credit. They’re also not intended for homeowners who plan to sell their homes soon. If you’ve hit your HELOC’s credit limit, some lenders won’t allow you to take out additional credit. Lenders can also charge fees, freeze your account, or change your credit line’s interest rate.
What is a Personal Loan?
Personal loans are a type of installment loan that comes from banks or online lenders. Loan amounts can range from a few hundred to tens of thousands of dollars. Lenders look at your financial history and other factors to determine what loan rates you qualify for. Repayment of a personal loan usually begins within 30 days and can last from two to seven years.
Pros
Most personal loan borrowers can receive funding within a few days, and like HELOCs, they can be used for just about everything. But unlike HELOCs, there’s no collateral. Most personal loans also have fixed interest rates (that are often lower than credit cards) with predictable payment plans. And, on-time payments can build your credit score.
Cons
Some personal loan lenders charge origination fees, or upfront fees to cover the processing of your loan. You may also need strong credit to qualify for a personal loan. Speaking of credit, missed personal loan payments can hurt your credit score. There’s also the risk of high monthly payments and high interest rates.
Best Uses
Your best borrowing option depends on the money’s use. Here are a few spending scenarios and which borrowing type is best. ● Home improvement projects: HELOCs are best if you plan to own your home long-term. If not, opt for a personal loan.
● Vehicle projects: If you’re looking to purchase or fix up a vehicle, personal loans may be the way to go. For homeowners, HELOCs can also be used for vehicle projects.
● Debt consolidation: Your situation will determine which option is best. If you’re not a homeowner, personal loans are your best option. For homeowners, it’s best to compare interest rates between HELOCs and personal loans before making a decision.
No matter what your next project is, you shouldn’t have to go broke. There are countless borrowing options out there – HELOCs and personal loans are just a few of them. And Gulf Winds Credit Union offers both!
Hunter Morrison
About Hunter Morrison
Hunter has freelanced for various print and radio publications across Northwest Florida, including The Bay Beacon, Navarre Press, Inweekly, Crestview News Bulletin, and WUWF. He was also the Editor in Chief of the University of West Florida’s student newspaper, The Voyager. In 2023, Hunter moved to Kenai, Alaska to take up a news reporting position with KDLL Public Radio. For fun, Hunter enjoys cross-country skiing, hiking, photography, thrifting, traveling, and looking for the best Thai food around.