Are HELOCs or Personal Loans Better for My Financial Needs?

When you're a homeowner with financial goals, choosing the right type of loan can feel like standing in front of a large food menu—overwhelming and full of options. Do you go with the classic, reliable option or try something new and promising? Today, we are breaking down two popular choices for homeowners seeking funds—home equity lines of credit (HELOCs) and personal loans. By the end of this guide, you will be well-versed in the differences between these two options, helping you confidently choose the best fit for your financial needs.

What are HELOCs and How Do They Work?

A HELOC, or home equity line of credit, is a revolving line of credit secured by the equity in your home, similar to a credit card but tied to your house. The bank sets a limit based on your home’s value and the existing balance on your mortgage, giving you access to funds up to that limit whenever you need it. This is called the draw period, typically lasting 5-10 years. During this time, you only pay interest on what you borrow, making HELOCs a flexible option for ongoing expenses like home renovations or surprise costs.

After the draw period comes the repayment period, when you pay back the money over an additional 10-20 years. Keep in mind that HELOC interest rates are variable, which means they can change with market conditions. Therefore, your rate could be lower at times, or higher at times.

When to Use HELOCs:

A HELOC is a great choice for homeowners planning big home improvements. For example, if you're remodeling your kitchen or adding another bedroom, it's handy to draw funds as you need them. Plus, it’s a helpful option for managing big, ongoing expenses like college tuition.

Examples: Picture Sarah, ready to turn her house into a dream home. With a HELOC, she can fund her renovation during each phase of the project, only paying for what she uses. Similarly, Mike, whose daughter starts college next year, can use a HELOC to manage tuition payments over several years.

What are Personal Loans and How Do They Work?

A personal loan is a type of unsecured loan, which means you do not need to use your home or car as collateral. You receive a lump sum that you repay in fixed monthly installments over 1 to 5 years. With fixed interest rates, personal loans offer predictable monthly payments, making them great for one-time expenses. While the interest rates are a bit higher than secured loans, the good news is that your home isn’t at risk!

When to Use Personal Loans:

As mentioned, personal loans can be a handy solution for those one-time expenses or debt consolidation. If you are dealing with high-interest credit card debt, a personal loan might help you save some cash. They are also perfect for covering medical bills, weddings, big moves, or any other large expenses that pop up.

Examples: Consider Jane, who has multiple credit cards with high-interest rates. She takes out a personal loan to combine her debts, reducing her overall interest and simplifying her payments. Meanwhile, Alex uses his personal loan to cover the costs of his wedding, enjoying fixed monthly payments and a clear repayment plan.

Comparing HELOCs vs. Personal Loans:

When choosing between a HELOC and a personal loan, it's important to know the differences. Let's discuss how they vary, helping you pick the option that best fits your financial situation and goals:

Interest Rates

• HELOCs: When comparing interest rates, HELOCs generally offer lower rates because they are secured by your home.
• Personal Loans: On the other hand, personal loans have higher fixed rates due to the lack of collateral.

Flexibility and Access to Funds

• HELOCs: The most flexible option. They allow you to borrow money as needed and only pay interest on what you borrow. This feature can be incredibly useful for projects with unpredictable costs.
• Personal Loans: On the flip side, personal loans give you a lump sum upfront, which might be perfect for handling fixed expenses.

Repayment Terms and Schedule

• HELOCs: Offer longer repayment terms, sometimes up to 20 years, making those monthly payments a bit easier on the wallet.
• Personal Loans: They usually come with shorter repayment periods, which means higher monthly payments but a faster way to get rid of debt!

Impact on Credit Score

• HELOCs: These might have a larger impact on your credit score due to their revolving nature. Using a big portion of your available credit could lower your credit score.
• Personal Loans: Having a personal loan can help improve your credit mix, but missing payments can negatively affect your score.

How to Choose Between HELOCs and Personal Loans:

When deciding between home equity line of credit and a personal loan, take a look at your finances and goals. Here are some things to consider:

1. Amount Needed: HELOCs are better for large, ongoing expenses. Personal loans suit smaller, one-time costs.
2. Repayment Flexibility: HELOCs offer flexible repayment options, providing some wiggle room. Personal loans provide fixed terms and payments, making things predictable and straightforward.
3. Risk Tolerance: HELOCs use your home as collateral, which increases the risk. Personal loans don’t require collateral, which might give you some peace of mind.

How to Find the Best HELOCs or Personal Loans for You:

HELOCs and personal loans each offer unique benefits for homeowners and borrowers. HELOCs provide flexibility and potentially lower interest rates, making them suitable for ongoing or large projects. Meanwhile, personal loans offer stability and simplicity, ideal for fixed, one-time expenses.

Before making a choice, take a moment to assess your financial needs and situation. It's a good idea to chat with a lender to get a clear picture of what each option means for you. Make sure you are comfortable with the repayment terms and aware of any potential risks. We suggest using financial calculators to help you better understand your borrowing power, interest rates, and repayment schedules. For example, to learn how to calculate a home equity line of credit, utilize the HELOC Calculator. Or, if you want to discover how to calculate loan comparison rates or how to consolidate debt, check out the Loan Comparison Calculator and  Debt Consolidation Loan Calculator.

At Academy Bank, we offer both HELOCs¹ and personal loans² tailored to your needs. Explore our options and find the perfect fit for your financial future. Ready to take the next step? Apply online to start your financial journey with confidence.

 

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¹ Subject to credit approval. Subject to collateral approval. Fees apply. Geographic restrictions apply. Documentation requirements may apply. Consult a tax advisor about tax deductibility.

² Subject to credit approval. Restrictions Apply. Direct deposit relationship required. Origination fee applies, 10% or $100 whichever is less. Annual Percentage Rate (APR) is based on credit score. Only one personal loan allowed to any borrower at any time. Loan terms are based on the loan amount.