HELOC or Personal Loan: Which One Is Right for You?

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Nov 14, 2024

HELOC or Personal Loan: Which One Is Right for You?

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If you are considering getting a loan, you may be debating whether to go with a home equity line of credit — HELOC for short — or get a personal loan. Well, you are in luck. Today, we will go over what exactly those things are, how they work, which is appropriate for what, and most importantly, help you decide between a HELOC and a personal loan.

In this article

What is a home equity line of credit (HELOC)?

Taking out a home equity line of credit differs from getting other kinds of loans. A HELOC is a credit line that remains open even if you pay the total balance. Furthermore, HELOCs usually have lower interest rates, which makes them very good for consolidating high-interest debts on loans like credit cards.

How does HELOC work?

First, a HELOC is a secured loan, meaning it is “protected” with collateral, i.e., your home. Of course, this also means you risk losing your home to foreclosure if you fail to make payments.

Secondly, think of HELOC as something close to a credit card, with a line of credit you can (but don’t have to) use up to the established credit limit. After that, you will be paying back the money you spent with interest.

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Best uses for HELOC

Generally, HELOCs are best used for major expenses rather than everyday purchases. The best uses for a home equity line of credit are:

High-interest debt consolidation

Using a HELOC for debt consolidation is a good idea because it usually has much lower interest rates than other loans. This means that you can pay off your loans with the home equity line of credit, pay back that money at lower interest rates, and save money in the long run.

Paying for higher education

Now, we know there are student loans designed for this kind of thing, but HELOC carries lower interest rates, you don’t have to use all the money from the line of credit, and you have manageable monthly payments. That said, this carries a risk of losing your home if you don’t make the payments in time.

Home renovations and repairs

Having access to an emergency fund if your home needs any repairs is always going to be a good thing. On the other side of the same coin, taking out a home equity line of credit for home renovations can bring up the resale value of your home. Bonus: if you spend your HELOC on home renovations, it is the only type of HELOC debt that may be tax-deductible.

Investing in new or existing businesses

After you’ve done all your research and found that a new business is a good fit for you to invest in, a HELOC can serve as a viable option for this kind of venture. Furthermore, if you want to finance improvements to an existing business, a HELOC can help, too. Just keep in mind that going into business is always a risk, especially if you will be putting up your home as collateral.

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What are personal loans?

A personal loan is a sum of money you can get for a variety of purposes, like debt consolidation, home renovations, paying for your dream wedding, or a down payment for a home. It’s possible to obtain a personal loan from banks, credit unions, and online lenders. If you get this type of loan, you will have to repay the money you borrow over time, usually with interest. Furthermore, some loan providers will charge fees for their loans.

How do personal loans work?

Personal loans can be both secured and unsecured, meaning you can get them with or without collateral. So, let’s look at how both types of loans work.

Secured personal loan

When you get a secured personal loan, you will have to put up collateral for it. The collateral is some type of valuable asset that the lender can take away from you if you miss payments. This way, they won’t be at a total loss; they will have whatever asset you put up as collateral to recoup their losses. With secured personal loans, you also pay less interest.

Unsecured personal loan

Unsecured personal loans are the most common type of loan. With them, you are not required to put up any collateral. This means that if you cannot repay the loan, the lender can’t take anything away from you. Therefore, these types of loans usually have higher interest rates than their secured counterparts.

Best uses for personal loans

There are several really good ways to utilize personal loans. So, let’s see their best uses and how they can benefit you the most.

Debt consolidation

Taking out a personal loan to consolidate your debts is a good plan and is one of the most common uses for this type of loan. You take out one loan to pay all your debts, and then you only have one payment to worry about — for the loan you took out to consolidate your debts.

Medical expenses

Taking out a personal loan can give you the funds you need to pay off any medical debt — especially if something took you by surprise — and help you before the debt gets out of hand.

Wedding planning

Another common use for personal loans is funding a wedding. Those can be costly, especially if you want to have all the bells and whistles.

Home improvements

If you ever thought about doing some home improvements, a personal loan could be an excellent way to get the funds needed. However, it is better to get a home equity line of credit for that since paying back a HELOC debt that has been used on home improvement can be tax-deductible.

Moving costs

Moving from one place to another can come with a lot of costs, no matter if you are moving within the same city, to another one, or even across states. So, it’s not uncommon to take out a personal loan to help relieve some of the stress of moving.

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