Mortgages & Home Loans Using Your Home Equity HELOC vs. Personal Loan: What’s the Difference? It's more than just variable vs. fixed interest rates By Yvette Glover Yvette Glover Yvette is a financial specialist and business writer with over 16 years of experience in consumer and business banking. She writes in-depth articles focused on educating both business and consumer readers on a variety of financial topics. Along with The Balance, Yvette's work has been published in Fit Small Business, StoryTerrace, and more. learn about our editorial policies Updated on July 24, 2022 Reviewed by Doretha Clemon Fact checked by Jane Meacham Fact checked by Jane Meacham Jane is a freelance editor for The Balance with more than 30 years of experience editing and writing about personal finance and other financial and economic subjects. learn about our editorial policies In This Article View All In This Article What’s the Difference? Which Is Right for You? The Bottom Line Frequently Asked Questions (FAQs) Photo: Davids Adventures Photos / Getty Images There are a few differences between a home equity line of credit (HELOC) and a personal loan, but the main ones are the interest rates and the use of collateral to back the loans. A HELOC requires a home as collateral; a personal loan typically requires no collateral at all. Further differences include repayment terms, available loan amounts, fees, and possible tax incentives. What’s the Difference Between a HELOC and a Personal Loan? The main difference between a HELOC and a personal loan is the collateral the financial institution will require for the loan. HELOCs use the borrower’s home as backup in case the borrower defaults. Personal loans often don’t need collateral, and this fact affects the way the two loan types are structured, including interest rates, repayment terms, loan amounts, and fees charged. This variance also can determine whether the borrower qualifies for certain tax incentives. HELOC Personal Loan Interest Rate Variable rate Fixed rate Collateral Home None Available Loan Amounts Usually $10,000 to a maximum amount set by how much equity you have in your home. Usually $1,000 to $100,000 Repayment Terms 10-year draw period and 20- to 25-year repayment period 12 to 60 months Fees Commonly appraisal and application fees, upfront charges including points, and closing costs Origination and possibly documentation fees Tax Incentives Possibly tax-deductible when used for qualifying home improvements None Credit Risk for Default Loss of home and damaged credit Damaged credit Interest Rate Interest rates for HELOCs versus personal loans are one of the most noticeable differences between the two financial products. HELOCs have variable interest rates, while personal loans offer fixed rates. This means the interest rates on a HELOC can and likely will rise as prime rates increase. Although most financial institutions have a cap on the interest rate for HELOCs, it’s ultimately up to the lender to decide. Note Some lenders may offer a fixed-rate option for all or part of the outstanding balance owed on a HELOC. You should inquire about this option, which could prevent rising interest rates from increasing your monthly payments. Collateral The most impactful difference between a HELOC and a personal loan is the collateral required. A HELOC assigns the borrower's home as collateral, but most personal loans require no collateral. Some larger personal loans may mandate some type of collateral, such as a car or savings account, but that’s rare. Available Loan Amounts Because a HELOC is based on the equity in the borrower's home, this type of loan allows for larger borrowing limits than personal loans. Most lenders have a maximum percentage of the home value they are willing to make available. HELOCs typically range from 75% to 85% of the home’s value, minus whatever balance is owed, making it possible to have access to hundreds of thousands of dollars. For example, if a house is valued at $600,000, the lender may decide to offer 75% of the value, or $450,000. The lender would then subtract the remaining balance the homeowner owes on the house. In this case, let’s say the homeowner still owes $300,000. If the homeowner is approved, the lender would issue a HELOC for $150,000. Similar to a credit card, HELOC withdrawals can be made in increments and taken at any time throughout the draw period, which is usually 10 years. Personal loans are taken in one lump sum, and typically grant lower amounts than HELOCs. Personal loans can be for any amount, but most often range between $1,000 and $100,000. Repayment Terms As mentioned, HELOCs are structured like a revolving credit line. The borrower is only required to repay the interest on the amount borrowed during the draw period—usually 10 years—instead of on the entire available credit amount. Much like a credit card, HELOC payments must be made monthly, until the total balance is paid off or until the end of the draw period. After the draw period ends, the borrower can no longer withdraw funds, and they will be responsible for making payments on the balance that remains. HELOC payments that formerly included only interest will be amortized and include interest as well as the principal balance. Borrowers will continue to make payments until the repayment period ends, typically 20 years. Personal loans, on the other hand, are fairly straightforward and are repaid in equal installments shortly after the lump sum is disbursed, often in two to five years. Personal loan payments are made on the account until the entire balance is paid off. Taxes One benefit HELOC borrowers find helpful is the tax incentives offered for some uses. Borrowers who withdraw HELOC funds for a home purchase or home improvement may be able to deduct the interest payments on their tax returns. However, the HELOC must be secured by a primary residence to qualify. Note Because personal loans are unsecured and considered to be for non-business use, they don’t qualify for the IRS deduction allotted to some HELOCs, even when used toward purchasing a home. Fees Loan fees can be a concern for any borrower looking to keep costs under control. Although some major banks offer HELOCs with no closing costs, such a loan’s likely administrative costs are a borrowing expense to consider. HELOC fees can comprise origination costs, title fees, and the cost of appraising the home. Personal loans usually have fewer fees than HELOCs, but origination costs are common. Any origination fees are set upfront and calculated into the loan balance. Some personal loans penalize borrowers for paying balances off early; however, most do not. Credit Impact Both HELOCs and personal loans typically are reported to one or more of the three major credit bureaus when obtained, and missed payments can negatively impact credit scores with either type of loan. As discussed, personal loans are unsecured, so non-payment primarily will result in damaged credit. Note The stakes are higher for HELOC borrowers who don’t meet repayment terms than for personal loan borrowers. Falling behind on HELOC payments could result in the loss of their homes, as well as damaged credit scores. Which Is Right for You? HELOC and personal loans both have pros and cons, but which suits you best will depend on the amount of money needed and the purpose of the loan. For those seeking a small sum, a personal loan can mean less paperwork and be easier to qualify for. If you’re a potential borrower with home equity who wants a larger amount of money, you may be better off opting for a HELOC. HELOCs work best for people who: Have equity in their homesWant flexibility in loan withdrawal amountsDon’t mind a loan with a variable interest rateNeed larger amounts for a home purchase or home improvementDon’t necessarily need funds now, but would like an additional line of credit in case of emergencies Personal loans may be the best option for people who: Are looking for a lump-sum disbursementWant a simple application processWant a fixed-rate installment loan with payments that stay the same every monthNeed a significant loan but don’t own a home or have enough equity for collateralSeek a relatively small loan of a few thousand dollars The Bottom Line The main differences between HELOCs and personal loans are the collateral required and the interest rates you’ll have in repayment. While HELOCs offer homeowners a way to access equity whenever they need it, the variable rate could mean rising monthly payments and a tighter budget in the future. Despite the appeal of a personal loan’s fixed interest rate, borrowers could be locked into a higher rate upfront, with loan terms that strain their budgets. Regardless, it’s crucial to shop around and review the loan terms that work best for your situation. Frequently Asked Questions (FAQs) What is a benefit of obtaining a personal loan? One of the best benefits of personal loans is their flexibility. Their lack of restriction gives borrowers the freedom to use the funds in the way they need—whether for starting a business, paying for a wedding, or consolidating debt—usually without committing collateral. Are there closing costs on a home equity line of credit? A few banks offer HELOCs without closing costs, but it’s more common for this form of financing to include origination costs such as title and attorney fees, mortgage filing fees, and the cost of appraising the home. Want to read more content like this? Sign up for The Balance’s newsletter for daily insights, analysis, and financial tips, all delivered straight to your inbox every morning! Was this page helpful? Thanks for your feedback! Tell us why! Other Submit Sources The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy. Clearview Federal Credit Union. “What Is the Prime Rate and Why Does It Matter?” Bank of America. “Fixed-Rate Loan Option.” Experian. “What Can Be Used as Collateral for a Personal Loan?” Rocket Mortgage. “Home Equity Line of Credit (HELOC) Defined & Explained.” Consumer Financial Protection Bureau. “My Lender Offered Me a Home Equity Line of Credit (HELOC). What Is a HELOC?” Wells Fargo. “Personal Loans.” Discover. “How Home Equity Loan & HELOCs Work: Rates, Terms, and Repayment.” Discover. “5 Things You Need To Know About Personal Loan Agreements.” IRS. “Real Estate (Taxes, Mortgage Interest, Points, Other Property Expenses).” Federal Reserve Board. “What You Should Know About Home Equity Lines of Credit,” Pages 2, 5-6. UW Credit Union. “HELOC, Home Equity Loan or Personal Loan.” Part Of What Is a HELOC? What Is a HELOC? Requirements for a Home Equity Loan or HELOC How HELOC Interest Rates Are Determined How Big of a HELOC Can I Get? How Does a HELOC Affect Your Credit Score? 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