HELOC vs. personal loan:
Which should you choose?
The right choice depends on whether you own a home, how much you need to borrow, and how you feel about using your property as collateral. Homeowners may also want to compare a cash-out refinance vs. HELOC. We'll break down exactly how each option works so you can decide which fits your situation.
HELOC vs. personal loan key differences
| HELOC | Personal loan | |
|---|---|---|
| Collateral | Home equity (secured) | Usually none (unsecured) |
| Interest rate type | Variable or fixed | Typically fixed |
| Loan structure | Revolving credit line | Lump-sum disbursement |
| Typical loan amounts | Higher limits available | Generally lower limits |
| Funding speed | May take longer | Often funds quickly |
| Risk level | Home is at stake | No property risk |
The core difference
A home equity line of credit (HELOC) is secured by your home and may offer lower interest rates, while a personal loan is usually unsecured and based on creditworthiness.
When a HELOC may be better
If you own a home with available equity, need a larger loan amount, or want access to lower rates, a HELOC could be the more cost-effective choice.
When a personal loan may be better
If you don't own a home, prefer not to use your property as collateral, or need funds quickly for a smaller expense, a personal loan may be simpler.
What is a HELOC?
A HELOC is a revolving credit line secured by the equity you've built in your home. Equity is the difference between your home's market value and what you still owe on your mortgage.
The average homeowner has more than $200,000 in home equity Opens in a new window. — that's a substantial amount to leverage for an unexpected bill, home improvement, or consolidating debt.
HELOCs typically come with variable interest rates, though some lenders offer fixed-rate options. Because your home serves as collateral, lenders generally offer lower rates than unsecured borrowing.
HELOC pros and cons
Pros
- Lower interest rates: Secured by your home, HELOCs may offer rates below unsecured loans
- Higher borrowing limits: Access larger amounts based on your home equity, often up to 80-85% of your home’s value
- Flexible access to funds: You can redraw as you pay down the principal during the draw period, similar to a credit card
- Potential tax benefits: Interest may be tax-deductible if used for major home improvements (consult a tax professional)
Cons
- Home is at risk: Since your property serves as collateral, you could face foreclosure if payments aren’t made
- Variable rates (typically): Most HELOCs have variable rates that shift with the market, though fixed-rate options exist
- Closing costs and fees: May include origination fees, appraisal costs, and other charges
- Longer approval process traditionally: May require appraisals and more documentation, though online lenders have streamlined this
What is a personal loan?
A personal loan is typically an unsecured loan, meaning approval is based on your credit history and income rather than collateral. You receive a lump sum upfront and repay it in fixed monthly installments over a set term.
Repayment terms usually range from one to seven years Opens in a new window. for personal loans. Because there's no collateral backing the loan, lenders take on more risk, which usually translates to higher interest rates compared to secured options like a HELOC.
Personal loan pros and cons
Pros
- No collateral required: Your home isn’t at risk if you can’t make payments
- Fixed payments: Predictable monthly payments make budgeting easier
- Faster funding: Many lenders may approve and fund loans in as few as a few days
- Simpler application: No appraisal or home equity verification required
Cons
- Higher interest rates: Unsecured loans may carry higher rates than secured options
- Lower borrowing limits: Maximum loan amounts are generally smaller than HELOCs
- Shorter repayment terms: Terms range from one to seven years, which may mean higher monthly payments
- Credit-dependent: Approval and rates depend heavily on your credit score and income
When to choose a HELOC over a personal loan
You want to consolidate debt at a lower rate
Because HELOCs are secured by your home, they may offer rates (currently averaging around 7%) Opens in a new window. that are lower than credit cards (20%+) Opens in a new window. or unsecured loans.
You’re planning big home improvements
HELOCs allow you to access larger amounts of capital, and the interest may be tax-deductible if the funds are used to substantially improve the property5: Navigates to numbered disclaimer.
You need longer repayment terms
HELOCs typically offer extended repayment periods compared to personal loans, which can result in a more manageable monthly payment for large, significant expenses.
When a personal loan may be the better choice
You don’t own a home or lack sufficient equity
A HELOC requires home ownership and available equity; personal loans don't.
You need a smaller amount
For modest borrowing needs, a personal loan may be simpler and faster to obtain.
You prefer not to risk your home
If using your home as collateral causes concern, an unsecured personal loan removes that worry.
Real Figure customer story
Solving tax debt and a reno with home equity
Shaun was hit with a $50,000 tax bill. He could have paid it outright, but he wanted to tackle long-planned home renovations, too. Instead of refinancing his low-rate mortgage, he used a Figure HELOC to do both, strategically.
*Individual experiences may vary and are not guaranteed. This testimonial reflects individual customer experience. Results are not typical and depend on market conditions and individual circumstances. Customer received a gift card for sharing their story.
Alternative borrowing options to consider
HELOCs and personal loans aren't your only choices. Depending on your situation, these alternatives might be worth exploring:
A home equity loan works similarly to a HELOC in that it's secured by your home, but instead of a revolving credit line, you receive a lump sum upfront with fixed monthly payments. This option may appeal to borrowers who want the lower rates that come with secured borrowing but prefer the predictability of fixed payments over a set term.
A cash-out refinance replaces your existing mortgage with a new, larger loan and gives you the difference in cash. This option might make sense if current mortgage rates are competitive with your existing rate, or if you want a single monthly payment. Keep in mind that refinancing resets your mortgage term and may involve closing costs.
For smaller expenses or short-term borrowing needs, credit cards may offer convenience and flexibility. Some cards come with introductory 0% APR periods that might help you avoid interest charges if you can pay off the balance quickly. However, standard credit card rates are typically much higher Opens in a new window. than both HELOCs and personal loans, so this option works best for manageable amounts you can repay relatively quickly.
How to decide between a HELOC and personal loan
Choosing between a HELOC and personal loan comes down to your specific circumstances.
Figure offers a HELOC with both fixed-rate1: Navigates to numbered disclaimer and variable-rate options2: Navigates to numbered disclaimer, fast funding in as few as five business days3: Navigates to numbered disclaimer.
Here are the key questions to ask yourself:
- Do you own a home with available equity?
If not, a personal loan is likely your only option. If you have equity consider the differences between a HELOC and home equity loan.
- How much do you need to borrow?
Larger amounts often favor a HELOC because of higher borrowing limits and lower rates.
- How important is the lowest possible rate?
HELOCs may offer lower rates due to collateral.
- Are you comfortable using your home as collateral?
If not, a personal loan may provide peace of mind.
- What will you use the funds for?
Home improvements may have tax advantages with a HELOC5: Navigates to numbered disclaimer (consult a tax professional).
Frequently asked questions about HELOCs and personal loans
Yes, some lenders offer fixed-rate HELOCs or fixed-rate draw options. Figure offers both fixed-rate1: Navigates to numbered disclaimer and variable-rate HELOC options2: Navigates to numbered disclaimer.
Personal loans have traditionally funded faster, but online HELOC lenders have streamlined the process considerably. Figure can provide approval in as little as five minutes, with funding in as few as five days.3: Navigates to numbered disclaimer Approval times vary by lender.
Both typically involve a hard credit inquiry Opens in a new window., which may temporarily affect your score. Responsible repayment on either may help build positive credit history over time.
Yes, both HELOCs and personal loans may generally be used for various purposes, including debt consolidation, home improvements, major purchases, or unexpected expenses.