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Personal Loan vs. HELOC: Which is Right for You?

What you'll learn: How to determine if you need a personal loan or a HELOC


From planned expenses like paying for a home renovation to unexpected costs like sudden medical bills or home repairs, expenses can add up. When they do, sometimes you need more cash than you have on hand.

A personal loan or a Home Equity Line of Credit (HELOC) can help. Factors like your credit score, homeownership status, how soon you need the money, and how much cash you need determine which form of borrowing is right for you. 

What is a Personal Loan?

A personal loan is money you borrow from a lender that you pay back in fixed monthly payments over time — typically up to five years, but longer terms may be available.

Today, more than 20 million Americans have personal loans. These can cover both planned and unplanned expenses and typically range from $1,000 up to $100,000 — but can be higher or lower.

When you take out a personal loan, like any loan, it requires a hard credit inquiry, which lowers your credit score by a few points temporarily.

Pros and Cons of a Personal Loan

Of course, a personal loan has its advantages and disadvantages. Before we explain what a HELOC is and how it works, let’s take a quick look at the pros and cons of a personal loan.

Pros of a Personal Loan Cons of a Personal Loan
Money is received within days Higher interest rates than a HELOC
Requires no collateral (unsecured loan) May have high fees and penalties
Money can be used for nearly anything Requires a hard credit inquiry (like any loan)

What is a HELOC?

One of the biggest perks of homeownership is creating equity in your home over time. You can use the equity you build up to secure low-interest credit in the form of a HELOC (sounds like, “He-Lock”). A HELOC allows you to borrow money against the value of your home.

A HELOC opens a line of credit for you as a borrower. Rather than a single lump payment with a personal loan, a HELOC provides a revolving credit line for a pre-approved amount (similar to a credit card). This can be useful if you are paying for ongoing expenses and need to borrow over a longer period of time.

Again, there are exceptions. Unlike a personal loan that provides your money in one lump sum, a HELOC is typically used for access to cash over a period of time. However, you are able to withdraw the entire line of credit from your HELOC, if you choose.

And unlike a personal loan, a HELOC usually has a variable rate, which means it can increase or decrease over time.

If you still have questions, we can give you a deeper look into what a HELOC is.

Pros and Cons of a HELOC

Like a personal loan, a HELOC has its benefits and drawbacks. While a HELOC is a great option in some situations, it may not always be your best choice.

Pros of a HELOC Cons of a HELOC
Can borrow only what you need Loan process takes several weeks
Allows you to borrow a larger amount than a personal loan Must use your home as collateral
Money can be used for anything Requires you to have enough equity built up in your home

Is a Personal Loan or HELOC Right for Me?

When comparing a personal loan vs. a HELOC, it depends on your situation. In some cases, a HELOC may be your best option because you need to borrow a large amount of money or because you want a lower rate. But on the other hand, when you need the money quick or when you don’t have enough equity in your home, a personal loan is your go-to. Let’s take a look at some specific situations.

Personal Loan vs. HELOC: Home Remodeling

The average home remodel cost ranges from $19,800 to $73,200. While some lenders may offer a personal loan of up to $100,000, other lenders may only smaller amounts like $20,000. If that’s the case, a HELOC is your best option, assuming you have enough equity in your home.

Another factor in a home remodel is the timing. Home remodels typically take several months to complete. That means you likely won’t need it quickly or all at one time. Because remodeling is a large expense that takes a long time to complete, a HELOC is a better option. A HELOC offers a lower interest rate, gives you the flexibility of borrowing the money only when you need it, and typically allows you a longer time period in which to pay it back.

Result: For expensive long-term projects like a home remodel, a HELOC is a better option.

Personal Loan vs. HELOC: Quick Home Repairs

While home remodels are planned projects, home repairs are likely to be unexpected, one-time expenses. Let’s say your furnace dies, a tree falls on your house, or your basement floods. Those are situations where you need money fast in order to fix the problem.

The approval process for a HELOC typically takes several weeks because most lenders will require a home appraisal. When you need money right away, you may not be able to wait several weeks. When you need money quickly, a personal loan is a better option because some lenders can fund your loan within a day of your application.

Result: When you need money fast, a personal loan is your best option.

Personal Loan vs. HELOC: Debt Consolidation

This is where it gets more complicated. Let’s say you have thousands of dollars of credit card debt across multiple credit cards. In theory, it would be best to consolidate that debt with whichever loan has a lower interest rate. By that logic, a HELOC would be best. However, it’s not that simple.

When you get a HELOC, you’re using your home as collateral, which means missing payments puts your home at risk. And unless you can be absolutely certain you won’t miss any payments, a personal loan is a safer option.

Personal loans are typically unsecured, which means they don’t require any collateral. So, if you don’t own a home or don’t have enough equity built up, a personal loan is the better option. Plus, a debt consolidation personal loan is one of the most common ways to handle credit card debt because it’s highly effective.

Result: Both are great options. HELOCs offer lower interest rates and more flexibility, but it requires your house as collateral, which can be risky. Personal loans are a common way to consolidate debt because they’re unsecured and you get the money you need quicker.

What to Remember When Making Your Decision

HELOCs are designed for flexibility. They give you the option to borrow money as needed and pay it back on a more flexible timeline. Personal Loans are more simplistic. They give you all the money you need at one time and you start paying it back the next month. Both are great options, and each person has a unique set of circumstances that help determine the best fit.

When you compare a personal loan vs. HELOC, the best way to decide which option is best is to chat to a lender about your financial situation.

Learn More About PenFed Personal Loans

Get a closer look at the rates, terms, fees, and loan amounts we offer.