HELOC vs Personal Loan – Which is better in 2025?

Selecting the right borrowing option is essential for managing both your immediate financial needs and long-term goals. It’s important to look for the right funds to achieve something important without putting your future financial stability at risk. For eligible borrowers, there are several financing options available two of the most common being Home Equity Lines of Credit (HELOCs) and personal loans.

 

In this article, we’ll talk about the differences between HELOCs and personal loans, help you decide which may suit your situation best, and reflect other potential alternatives to consider.

What Is a HELOC?

A Home Equity Line of Credit (HELOC) is a type of revolving credit that functions as a second mortgage. It allows you to borrow against the equity in your home, which serves as collateral. The amount you can access is normally based on the current market value of your home and how much you still owe on your existing mortgage.

 

Lenders usually permit your combined mortgage debt, including any HELOC, to range between 60% and 85% of your home’s appraised value. For instance, if your property is valued at $400,000 and your remaining mortgage balance is $200,000, you could be eligible to borrow anywhere from $40,000 to $140,000 through a HELOC, depending on your credit profile and the lender’s terms.

 

Using the credit line is optional, though some lenders may require an initial minimum withdrawal when the account is first opened. You’re only charged interest on the funds you actually use- not the total credit limit. So if you qualify for a $140,000 HELOC but only access $25,000, you’ll only pay interest on that amount.

 

Most HELOCs come with a 10-year draw period, during which you can borrow as needed and make interest-only payments. After this phase, repayment terms vary you might be required to pay the remaining balance in full (a balloon payment) or repay it over a longer period, such as 20 years, with regular principal and interest payments.

What Is a Personal Loan?

A personal loan is a type of fixed-term installment loan, often unsecured, meaning it doesn’t require collateral. These loans generally feature a fixed interest rate and consistent monthly payments over a set repayment period. Loan amounts usually range from $1,000 to $50,000, although some lenders may offer up to $100,000 to qualified borrowers.

 

Since personal loans are unsecured, lenders mainly rely on your credit score, income, and overall financial profile to determine your eligibility, loan amount, and interest rate. As borrowers with excellent credit may secure more favorable terms, interest rates for personal loans are generally higher than those offered with secured options like HELOCs.

 

One of the biggest advantages of personal loans is their flexibility. You can use the funds for a variety of purposes, including emergency expenses, medical bills, large purchases, debt consolidation, or even home renovations. Personal loans are especially useful if you don’t have sufficient home equity to qualify for a HELOC or if you prefer not to leverage your home as collateral.

 

It’s important to note that, unlike HELOCs, the interest paid on personal loans is not tax-deductible. However, they can still offer a fast, straightforward solution for covering both planned and unexpected costs.How Does a HELOC Work?

A Home Equity Line of Credit (HELOC) is a flexible borrowing option that lets homeowners tap into the equity they’ve built in their property. As a form of revolving credit, similar to a credit card but secured by your home, it provides access to funds that you can draw from as needed, usually at lower interest rates than unsecured loans.

 

A HELOC operates in two distinct phases:

 

Draw Period

Lasts 5 to 10 years.

You can borrow funds multiple times, up to your approved limit.

You only pay interest on the amount you’ve withdrawn, not the total credit line.

Repaid amounts become available again for use during this period offering revolving access to funds.

Repayment Period

Lasts 10 to 20 years after the draw period ends.

You must repay both the principal and interest during this phase.

No further withdrawals are allowed.

How Does a Personal Loan Work?  

A personal loan is a famous financing option that offers a huge payment upfront, normally without requiring any collateral. Most personal loans are unsecured, meaning approval is based primarily on your credit score, income, and overall financial profile rather than assets.

 

You’ll receive the entire loan amount as a single lump-sum disbursement when approved, which you’ll repay in fixed monthly installments over a set loan term, usually ranging from 2 to 7 years. The interest rate is fixed, making it easier to budget with predictable payments each month.

What Are The Types of HELOCs?

There are two main types of HELOCs:

Traditional variable-rate HELOCs 

Fixed-rate (hybrid) HELOCs.

In a traditional variable-rate HELOC, you’re approved for a credit limit based on your home equity. You can borrow from this line as needed during the draw period, which usually lasts 5 to 10 years. The interest rate is variable, meaning it can fluctuate over time based on market conditions. You normally pay only interest during the draw period, and once it ends, you enter the repayment period where both principal and interest payments are required.

 

Meanwhile, in a fixed-rate or hybrid HELOC, you have the option to lock in a fixed interest rate on a portion or all of the amount borrowed. This gives you more predictable monthly payments and can be beneficial if you expect interest rates to rise. These HELOCs often allow multiple fixed-rate segments, and you can continue drawing from the remaining variable-rate portion if needed.

 

Some HELOCs may include features like interest-only payments for the first few years, balloon payments at the end of the term, or immediate principal and interest payments. The exact terms and flexibility depend on the lender and your financial preferences.

What Are the Types of Personal Loans?

Here are the main types of personal loans:

 

Secured Personal Loans

These loans require collateral such as a vehicle, savings, or other assets. Because the lender has a guarantee, they usually offer lower interest rates and are easier to qualify for, even with poor credit.

 

Unsecured Personal Loans

No collateral is needed, and approval is based on your creditworthiness. These are the most common type of personal loans but often come with higher interest rates than secured ones.

 

Fixed-Rate Personal Loans

The interest rate and monthly payments remain the same throughout the loan term. This type is ideal if you want stable, predictable payments.

 

Variable-Rate Personal Loans

The interest rate can change over time based on market conditions. These loans may start with lower rates but can become more expensive if rates rise.

 

Debt Consolidation Loans

Specifically used to combine multiple debts into a single loan. Taking out a personal loan for debt consolidation can simplify your monthly payments and often reduce your total interest burden. It’s a practical way to manage debt more efficiently and regain control of your finances.

 

Co-signed Personal Loans

A co-signer with strong credit helps you qualify for the loan. If you fail to repay, the co-signer becomes legally responsible. This can improve your chances of approval and better rates.

 

Personal Lines of Credit

You’re approved for a maximum limit and can borrow from it as needed, like a credit card. You only pay interest on the amount you actually use. Personal Lines of Credit offer a smart, convenient way to manage your cash flow.

HELOC vs. Personal Loan: Key Differences

Picking between a Home Equity Line of Credit (HELOC) and a personal loan can be confusing when you’re in need of extra funds. Here’s a clear demonstration of the major differences between the two, so you can make a well-informed borrowing decision.

Collateral Requirements

HELOC: A HELOC uses your home as collateral, which means if you miss payments, foreclosure is a real risk. This type of credit is tied to the equity you’ve built in your property.

Personal Loan: Normally unsecured, personal loans don’t require any assets as collateral, reducing the risk to the borrower. However, if your credit profile isn’t strong, you may still consider a secured personal loan to access larger loan amounts or better terms.

 

Eligibility Criteria

HELOC: You usually need at least 15–20% equity in your home, a credit score above 680, a steady income, and a debt-to-income (DTI) ratio under 43% to qualify. Lower credit scores make it significantly harder to get approved.

 

Personal Loan: Lenders evaluate your credit score, income, and employment status. While good credit helps, there are plenty of personal loan options available even for those with poor credit or high DTI ratios, especially for debt consolidation purposes.

 

Funding Speed

HELOC: Approval involves a detailed review process, including a potential home appraisal. As a result, getting access to funds may take anywhere from 2 to 6 weeks depending on your lender and financial profile.

 

Personal Loan: A personal loan is the better bet if you need quick cash. Approval and disbursement often happen within a few business days.

 

Fees and Upfront Costs

HELOC: Expect several upfront charges including origination, appraisal, and closing costs. Appraisal fees typically range from $300–$500, and origination fees are about 1%–2% of your credit line.

 

Personal Loan: These loans are generally more cost-effective upfront. There are no appraisal or closing costs, and origination fees can vary between 1%–8% of the total loan amount.

 

Loan Amounts Available

HELOC: You can potentially borrow up to $500,000, depending on your home equity and overall financial strength.

 

Personal Loan: Most lenders cap loan amounts around $50,000, though some high-limit personal loans may extend to $100,000 for qualified borrowers.

 

Interest Rates

HELOC: Because your home backs the loan, interest rates are more competitive, usually falling between 8.64% and 10.72%. However, these are variable rates, so payments may increase over time.

 

Personal Loan: Rates vary based on creditworthiness, ranging from 10.73% for excellent credit to over 30% for poor credit. These are usually fixed rates, which means consistent monthly payments.

 

Repayment Terms

HELOC: During the draw period, you’re only required to pay interest. Once that ends, repayment begins and your monthly payments may change due to fluctuating interest rates.

 

Personal Loan: Repayment starts one month after funding and follows a fixed monthly schedule, making it easier to budget and plan.

 

How to Choose Between a HELOC and a Personal Loan?

Your financial circumstances, objectives, and risk tolerance will all play a role in your decision between a personal loan and a Home Equity Line of Credit (HELOC). Think about the following important questions to choose the best borrowing option: 

 

1. Do You Have Enough Home Equity?

A HELOC isn’t an option if you don’t own property, since these lines of credit are backed by your home’s equity. In Canada, most lenders require at least 20% equity to qualify for a HELOC. Without that, a personal loan is your go-to solution. Even if you do have sufficient equity, remember: using your home as collateral puts it at risk if you can’t meet repayment terms. If you prefer to avoid tying debt to your property, a personal loan offers a safer, unsecured alternative.

 

2. What’s the Purpose of the Loan?

Your borrowing goals matter.

 

Need a fixed amount for a single expense like medical bills, a car repair, or debt consolidation? A personal loan makes sense.

Planning multiple expenses over time like renovations spread across a year? A HELOC provides flexible, revolving credit that you can draw from as needed.

A personal loan is ideal for predictable, one-time costs. A HELOC works better when your expenses are spread out or vary in total.

 

3. Which Interest Rate Works for You?

Because HELOCs are secured by your home, they generally come with lower interest rates than unsecured personal loans, assuming you have a solid credit score. This can make them more affordable in the long run.

However, if you lack collateral or simply don’t want to put your home on the line, an unsecured personal loan may be the better choice. As rates may be higher, the risk is lower, especially if you’re borrowing smaller amounts.

What is the Benefit of Obtaining a Personal Loan Instead of a HELOC?

A significant benefit of a personal loan over a home equity line loan (HELOC) is that it is unsecured, which means you are not required to pledge your house or any other asset as security. Rather, to evaluate your eligibility and interest rate, lenders look at your income, work history, credit score, and general financial profile. 

1. No Risk to Your Home

Your home isn’t on the line with a personal loan. If you fall behind on payments, you won’t face the threat of foreclosure. This makes personal loans a safer option for those who either don’t own a home or simply prefer not to risk losing one.

2. Protection From Market Fluctuations

Personal loans aren’t tied to your home’s market value unlike HELOCs. So even if property values drop, you’re not left underwater or stuck owing more than your home is worth.

3. One-Time Lump Sum Keeps Borrowing in Check

Personal loans offer a fixed lump sum upfront, which helps you stay within your budget. With a HELOC’s revolving credit, it’s easy to over borrow or accumulate more debt than planned. A personal loan, on the other hand, encourages more disciplined borrowing.

4. Faster Funding Times

Personal loans are generally funded within a few business days, making them ideal for time-sensitive expenses. By contrast, HELOCs involve longer approval processes, sometimes up to six weeks, and often require a home appraisal.

5. Predictable Payments and Fixed Rates

Most personal loans come with fixed interest rates, allowing for consistent monthly payments over the loan term, usually between 2 and 7 years. This predictability makes budgeting much easier than managing the variable interest rates that often come with HELOCs.

6. Transparent Costs

As personal loans may include fees, like an origination fee (a one-time charge to process the loan) or a prepayment penalty, you’ll know these costs upfront. There are no closing costs, appraisal fees, or title-related expenses typically associated with HELOCs.

HELOC vs. Personal Loan—Which is better in 2025?

A HELOC is best for larger expenses or ongoing projects that require access to funds over time. It usually offers lower interest rates, making it a cost-effective choice for long-term borrowing. However, since your home secures the loan, you risk losing it if you default. Also, HELOCs often come with variable rates, which can increase over time.

 

On the flip side, a personal loan may be the better fit for a single, one-time purchase, especially if you qualify for a competitive interest rate. It’s generally easier to apply for and doesn’t require collateral, which means your property isn’t at risk. Plus, you can avoid closing costs and may face fewer fees, making personal loans more affordable upfront.

 

In short:

Pick a HELOC for ongoing expenses, larger projects, or lower long-term rates.

Go with a personal loan for one-time costs, fast approval, and minimal fees.

Alternatives to HELOCs and Personal Loans

There are a number of different borrowing choices that may be able to meet your financial needs if you are not eligible for a personal loan or a Home Equity Line of Credit (HELOC). Some of the better options to think about are listed below, along with advantages and disadvantages: 

1. Credit Card

Using a credit card can be a convenient way to cover short-term expenses or emergencies, especially if you qualify for a card with a low introductory APR or 0% interest promotional period. However, keep in mind that credit cards often carry high interest rates once the promotional period ends, so they’re best for short-term borrowing and situations where you can pay off the balance quickly.

2. Home Equity Loan

A home equity loan provides a lump sum payment with a fixed interest rate and repayment term unlike a HELOC. It’s a good choice if you need a predictable monthly payment and are planning a large, one-time expense like a major home renovation. However, like a HELOC, this type of loan is secured by your home, so there is a risk if you’re unable to make payments.

3. Mortgage Refinance

Refinancing your mortgage allows you to take advantage of lower interest rates or better loan terms. A cash-out refinance is especially useful if you want to tap into your home’s equity while also replacing your current mortgage with a new one. This option can help you access larger sums, but be aware of closing costs and potential extended loan terms.

4. Personal Line of Credit

A personal line of credit offers flexible borrowing similar to a HELOC, but it’s unsecured, meaning you don’t need to use your home as collateral. It’s ideal for recurring expenses or financial uncertainty, allowing you to borrow only what you need when you need it. However, qualifying can be more difficult without strong credit, and interest rates may be higher than secured loans.

5. RRSP Loan (Canada-specific)

For Canadian borrowers, an RRSP loan can help you catch up on unused Registered Retirement Savings Plan (RRSP) contributions. By borrowing to contribute to your RRSP, you may receive a larger tax refund, which can then be used to repay the loan. This strategy is best used with careful planning and financial advice to avoid long-term debt.