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Personal Line of Credit vs HELOC: The Differences, Similarities, & Examples

Personal Line of Credit vs HELOC
Sulaiman Abdur-Rahman

Sulaiman Abdur-Rahman

Updated May 6, 2022
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A personal line of credit and home equity line of credit are similar lending products with key differences. A home equity line of credit, also known as a HELOC, allows homeowners to borrow against the available equity in their homes.Homeowners can withdraw funds from their HELOC accounts to finance personal spending. The HELOC is secured by the homeowner’s property as collateral, which means the creditor may foreclose on the home if the homeowner fails to make HELOC repayments.A personal line of credit can either be secured with collateral or unsecured without pledging any assets as collateral. Like a HELOC, personal lines of credit give borrowers the ability to withdraw funds from a revolving credit account to spend on personal endeavors. Below we highlight examples of how consumers may use a HELOC or personal line of credit.

How Does a Personal Line of Credit Work?

Borrowers with good credit may qualify for secured or unsecured personal lines of credit. Applying and getting approved for an unsecured personal line of credit may take several minutes with some creditors. Getting a secured personal line of credit may take longer as creditors must verify any pledged collateral.A personal line of credit gives borrowers an open-end credit account from which they can borrow up to a certain limit. Creditors may determine your credit limit based upon your creditworthiness and annual income. Some financial institutions may offer personal lines of credit up to $100,000. The creditor may charge interest whenever a borrower withdraws money from the account.Borrowers can repeatedly draw money from the account as long as they make repayments to replenish and restore the available credit. Borrowers may make minimum monthly payments on the personal line of credit, or borrowers can make larger payments up to the full amount owed. The account may remain open for an indefinite period of time.

How Does a HELOC Work?

Homeowners with good credit may qualify for a HELOC account. A HELOC gives homeowners an open-end credit account from which they can borrow up to a certain limit. Establishing a HELOC account can take several weeks from application to signing the final documents at closing.Creditors may determine your credit limit based upon the amount of available equity you have in your home. People who own their homes in full without any mortgage obligations have 100% equity in their homes. If your home is worth $400,000 and you owe $100,000 on a mortgage, you have $300,000 in home equity.Homeowners with sufficient equity in their homes may borrow up to 90% of their home equity with a HELOC. Borrowers may have to pay closing costs to secure the line of credit. The account may have a draw period of five to 10 years from which you may draw funds. You may have to pay interest charges during the draw period on HELOC funds you borrow.The HELOC may enter a repayment period when the draw period closes. The repayment period may range from 10 to 20 years. The borrower at this stage may no longer draw funds from the account and must begin making monthly payments toward any outstanding principal plus interest.Creditors may also charge an annual maintenance fee on the HELOC account. The account closes when the repayment term ends.

Personal Line of Credit vs HELOC: Which Is Best for You?

Creditworthy homeowners may qualify for a personal line of credit or HELOC. The following table may help you determine which line of credit is best for you:

Consolidating Credit Card Debt

Consumers can borrow money from a HELOC or personal line of credit for the purpose of consolidating credit card debt. Interest rates on a HELOC and personal line of credit are typically lower than interest rates on credit cards.One of the top reasons to get a personal loan is debt consolidation. Personal loans, however, may not carry the same flexibility as a revolving line of credit. Lines of credit and personal loans are among the secured and unsecured loans consumers may consider.You may qualify for better terms if you pledge collateral on a consumer loan, but lenders may seize your collateral if you default on the loan.

Home Improvements

Consumers can borrow money from a HELOC or personal line of credit to help finance home improvements. For example, consumers may use HELOC or personal line of credit account funds as pool loans to cover the cost of installing a swimming pool.You may finance home improvements with lines of credit or a personal loan. Being prequalified or preapproved for credit does not guarantee final approval, but personal loan preapproval can give you a head start in the process.Borrowers may need good credit to qualify for a HELOC or personal line of credit. Subprime borrowers may consider personal loans for bad credit as a possible financing option for home improvements.

Choosing a Personal Line of Credit

Here are some reasons for choosing a personal line of credit vs. other alternatives:

Lower Expenses

Personal lines of credit can have lower expenses than other consumer lending products. You only pay interest on money you borrow, and the interest rate is generally lower than credit card interest rates.Personal lines of credit may include annual maintenance fees, but the account might not include closing costs. The interest rate on a secured personal line of credit may be lower than the rate on an unsecured line of credit.Borrowers may need good credit to qualify for a personal line of credit. Near-prime borrowers may consider personal loans for fair credit as an alternative.

Risking Your House

Unlike a HELOC, you can get a personal line of credit without risking your house. Unsecured personal lines of credit feature no collateral requirements. A personal line of credit can give homeowners financing to make home improvements without pledging the home as collateral.Personal loans are another consumer lending product that can provide homeowners with financing to make home improvements. Homeownership is a source of wealth, and using a personal loan with no collateral needed to improve your home in some cases may bolster the value of your home.

Lack of Equity

Homeowners with a lack of equity in their homes may consider a personal line of credit as a potential source of financing. A HELOC is simply not an option for homeowners with insufficient equity or renters who don’t own real estate.

Good Credit Score

Consumers with a good credit score may qualify for a personal line of credit. Borrowers with bad credit or no credit can get an unsecured personal loan, but they may have to pay higher interest charges and fees.Lenders generally offer the best terms and conditions to borrowers with excellent credit. Subprime borrowers who improve their credit scores may be able to get personal lines of credit or personal loans for good credit.

Choosing a HELOC

Here are some reasons for choosing a HELOC vs. other alternatives:

A Lot of Equity

Homeowners with a lot of equity in their homes may consider a HELOC. Borrowing up to 90% of the equity in your home can give you financing to cover large expenses. A HELOC can help you finance home improvements, which in some cases may bolster the value of your home.

Bad Credit Score

Homeowners with a bad credit score may still qualify for a HELOC if they have steady income and low debt-to-income ratios. Creditors may charge higher interest rates to borrowers with bad credit, but the highest rates on a HELOC are generally lower than the highest rates on a personal loan or credit card.

Low Interest Rates

A HELOC can include low interest rates. Homeowners with excellent credit may qualify for annual percentage rates of interest as low as 4% on a HELOC. Meanwhile, the best rate on an unsecured personal line of credit could hover around 10.5% APR with some lenders.

Renovating Your Home

A HELOC may provide you with financing for renovating your home. The cost of any home renovation project could be expensive. For example, the cost of remodeling your kitchen can exceed $30,000.Even the cost of kitchen appliances can carry sizable price tags, according to HomeAdvisor. A HELOC may help you cover the costs of replacing old appliances and renovating your home.

The Takeaway

Homeowners with sufficient home equity may draw HELOC account funds, and anyone with good credit may borrow against a personal line of credit. These consumer lending products have their advantages and disadvantages, so borrowers may want to consider other alternatives before submitting any applications.Lantern by SoFi can help you compare personal loan options. Just provide basic information about yourself and the loan you need, and Lantern can guide you in the process to apply for a personal loan with the lender of your choice. Check your rate today and see if you prequalify.
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The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.LCPL0322009

Frequently Asked Questions

What’s the difference between a personal line of credit and a home equity line of credit?
Can I use my personal line of credit to buy a house?
Is a personal line of credit better than a HELOC?

About the Author

Sulaiman Abdur-Rahman

Sulaiman Abdur-Rahman

Sulaiman Abdur-Rahman writes about personal loans, auto loans, student loans, and other personal finance topics for Lantern. He’s the recipient of more than 10 journalism awards and currently serves as a New Jersey Society of Professional Journalists board member. An alumnus of the Philadelphia-based Temple University, Abdur-Rahman is a strong advocate of the First Amendment and freedom of speech.
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