Home equity line of credit vs personal line of credit

What's the difference? When looking at lending options, make sure you choose the best one for your needs, lifestyle and budget.

If you’re a homeowner interested in consolidating debt, doubling down on that fun remodeling project or paying for unexpected expenses, you might be considering different borrowing options such as a home equity line of credit (HELOC), a home equity loan, or a personal loan. But which one is the best fit for your needs?

Here’s a look at each option’s key differences and advantages, along with examples of how they can be used. That way, you’ll have greater confidence deciding which option is best for you.

Home Equity Line of Credit (HELOC)

A home equity line of credit (HELOC) allows you to tap into your home’s value to cover big expenditures or unexpected costs. It’s essentially a line of credit based on how much of your home you actually own, i.e., the current market value minus what you still owe. With a HELOC, you can borrow what you need, when you need it, up to your credit limit. And because the loan is tied to the value of your home, HELOC interest rates are often more favorable than those of traditional lines of credit.

Advantages:

• Flexibility – HELOCs are super convenient—kind of like borrowing with a credit card. You can spend up to your limit every month, or nothing at all—it’s entirely up to you. At UW Credit Union, you can lock in the best rates up to five times during the term of your line.
• Pay as you go – During the draw period, which is the set time frame for withdrawing funds, you only have to pay interest on the amount of money you use. This gives you more freedom over how much you have to pay and when you have to pay it. But keep in mind that once the draw period ends, the loan converts to a repayment schedule, and both principal and interest payments are due every month.
• Tax advantages – Similar to home equity loans, interest on HELOC funds used to purchase, build or substantially renovate your home are tax deductible.

When it’s right:

Home equity lines of credit are smart for large projects that need to be done in phases, big expenses, or emergency funds, as long as you’re paying off the balance in at least one to three years. Examples of how people use HELOCs include home improvements, consolidating debt, educational costs, or paying for medical bills. Explore UW Credit Union’s current rates, or get a custom rate quote.

Home Equity Loan

Similar to a HELOC, a home equity loan is secured by your equity, or how much of your home you actually own. However, with a home equity loan, you receive one lump sum with a fixed rate for terms of up to 15 years.

Advantages:

• Low interest rates – Because there are valuable assets backing the funds, interest rates on home equity loans are typically lower than other types of loans.
• Stable – Your loan’s rate, term and amount are all fixed, so you can rest easy knowing your payments will stay the same and your rate won’t go up.
• Tax deductible – Similar to HELOCs, you can deduct interest on home equity loan funds used to purchase, build or substantially renovate your home.

When it’s right:

Home equity loans are great for larger purchases or investments that will take more than five years to pay off—especially if you’ve built up substantial equity in your home. Examples of different uses include debt consolidation, emergency funds, paying off debt or educational costs. Check out our current rates, or get a custom rate quote.

Personal Loans

A fixed-rate personal loan is a great way to take control of your finances. Because it’s an “unsecured” loan, meaning you don’t need to put up any collateral to get it, the application and approval process is very straightforward. In most cases, you will get a decision quickly and could get access to the funds the same day. Approval is based on a number of things, including your credit history, monthly income and debt obligations. Interest rates are based on credit scores and are typically much lower than that of credit cards.

Advantages:

• Affordable – On average, personal loans have significantly lower interest rates than credit cards, making them a great option for those looking to consolidate high-rate debt.
• Simple – Because the rate, term and amount of the loan are all fixed, your payments will stay the same and your rate won’t go up.
• Quick & easy – All it takes is your ID, a copy of your most recent paystubs and a quick credit check to begin processing an application. Most applications are processed within one day, and funds are ready within hours of signing for the loan.

When it’s right:

Personal loans are excellent for when you have smaller to medium purchases ($1,000-$10,000) in mind, are attempting to consolidate higher interest debt, or need access to the funds more quickly. Paying for moving expenses, wedding costs or vehicle purchases are among the other uses for personal loans. Check out our current rates here.

Still Need Help Deciding?

When it comes to personal financing, there is no single right answer for everyone. Get the friendly, supportive guidance you need by contacting one of our loan officers. They’re ready to assist you on your financial journey!

What's the difference between a personal line of credit and a home equity line of credit?

What are the disadvantages of a home equity line of credit?

Is it better to get an equity loan or line of credit?

Does it hurt to have a home equity line of credit?