HELOC vs Personal Loan: Key Differences Explained

A HELOC is a line of credit that allows you to borrow money based on the equity you’ve built in your home. Unlike a personal loan, which provides a lump sum, a HELOC lets you withdraw money as needed throughout the draw period, paying interest only on the amount used.

Many HELOCs have an initial draw period (e.g., 10 or 15 years), during which you can borrow against your credit line up to a predetermined amount. After the draw period ends, you enter a repayment period where you’ll pay back the principal and interest over a set number of years (e.g., 10 to 20 years). HELOC interest rates are variable and tied to the prime rate, which means your monthly payments can fluctuate.

Because a HELOC is a secured loan, meaning it’s backed by your home, the interest rates are often lower than those for unsecured loans. However, this also puts your home at risk if you cannot repay the loan.

Some common uses for a HELOC include:

• Ongoing, irregular, or seasonal expenses
• Home renovations that unfold over several months
• An emergency or education fund
• Buying a property

A personal loan is an installment loan that provides a lump sum of money upfront, usually with fixed personal loan interest rates and predictable loan repayment terms.

Most personal loans are unsecured, meaning they are not backed by a specific asset like your home. The interest rates are also fixed, so they’ll stay the same throughout the life of the loan.

The loan approval process for a personal loan is usually faster than a HELOC because it does not require a home appraisal. Getting a personal loan involves an assessment of your credit history, income, and debt-to-income ratio.

Personal loans can be used for a variety of purposes, such as:

• Consolidating higher-interest debt
• Paying for a single large purchase or major life event
• Covering medical expenses or emergencies

Both HELOCs and personal loans can be useful financial tools, but they have distinct features that make them suitable for different situations.

Here’s a comparison: 

The decision between a HELOC and a personal loan depends on your financial circumstances and goals. A personal loan is a popular financing option because it allows you to tailor your funding needs to your budget, without borrowing against your home to secure it. 

A personal loan may be more affordable on a monthly basis because you lock in an interest rate for the entire loan term. Once you select your loan amount and repayment terms, the monthly payment will stay the same. However, a strong credit profile and income are key to qualifying and getting a lower rate.

Here are a few situations where a personal loan may make more sense:

• You need a specific amount of money for a one-time expense, and you don’t have equity, or want to use it, to secure the funds
• You want to lock in a fixed interest rate and prefer a predictable repayment schedule with a fixed payment amount
• You want to consolidate high-interest debt, such as credit cards, medical debt, or other personal loans
• You need a faster loan decision and funding that takes a few days rather than weeks

HELOCs are a common financing option for home renovations—the interest is tax-deductible if you use the funds for a home improvement project that substantially improves the residence. However, the approval process can take several weeks from application to funding. And if you sell your home before the loan is repaid, the remaining balance will be paid using the proceeds from the sale.

Here are a few scenarios where it may be better to opt for a HELOC over a personal loan:

• You need access to funds over time for ongoing projects where the costs might vary
• You anticipate needing to borrow multiple times
• You’re comfortable with a variable interest rate and the risk of using your home as collateral
• You only want to pay interest on what you borrow each time rather than the full amount available

If you're considering financing options, BHG Financial can help. We offer personal loans specifically designed for borrowers who want to secure financing at a low fixed rate with a predictable and straightforward repayment structure.

Most lenders offering personal loans can only finance amounts between $1,000 and $50,000, and HELOCs are typically capped by your available equity. BHG can fund larger loan amounts—up to $250,000¹—without requiring you to use your home as collateral.

Here are a few additional advantages of choosing to lend with BHG:

1. Personalized support: You’ll work directly with an experienced loan expert who will guide you through the process step-by-step and tailor loan options to your financial objectives.
2. Streamlined application process: Our application process is efficient and fast—once approved, you can get the funds in as few as five days.² You can also prequalify online and compare terms without impacting your credit score.⁴ 
3. Track record of success: BHG has a 20-year track record of helping busy professionals access smart financing solutions without sacrificing the lifestyle you’ve worked hard to build.

Ready to see what’s possible? Use our quick and easy payment estimator to get your personalized loan solution in just seconds. 

Can I use a personal loan to consolidate debt?

Yes, a personal loan is a common option for debt consolidation. By taking out a personal loan with a lower interest rate than your existing debts (such as credit cards), you can pay off those debts and then make fixed monthly payments on the personal loan. This can simplify your finances and potentially save you money on interest over time.

Is interest on a HELOC tax-deductible?

The interest paid on a HELOC may be tax-deductible if you meet certain criteria. According to the IRS, for interest to be deductible, the borrowed funds must be used to “buy, build, or substantially improve the residence.” It’s important to consult a tax advisor for guidance tailored to your specific situation.

How does my credit score affect loan approval?

Credit score requirements for loans vary, but it’s a significant factor in the approval process. A higher credit score generally indicates a lower risk to lenders, which can result in better personal loan interest rates and more competitive terms. Borrowers with lower scores may still be approved, but they may face higher interest rates and less favorable terms.

What are the risks of using my home as collateral?

The primary risk of borrowing against your home equity and using it as collateral to secure a loan is the potential for foreclosure. If you are unable to make your HELOC payments, the lender has the right to take possession of your home to recover the outstanding debt.

How quickly can I get funds from each loan type?

The time it takes to receive funds can vary for both HELOCs and personal loans depending on the lender. For a personal loan, you can typically receive a lump sum within a few business days once approved. The loan approval process for a HELOC can take longer, up to several weeks, as it often involves a home appraisal. Once the HELOC is approved, you can withdraw funds as needed during the draw period.