With the latest headlines about rates, inflation and gas prices, many homeowners are looking to consolidate debt and pay off higher-rate loans and credit cards. That’s why it’s more important than ever for homeowners to clearly understand your options—so you can choose the solution that’s best for you.

HELOC or Personal Loan: which is better for you?

You probably see a lot of advertisements about personal loans that are easy to apply for and offer fast cash. The truth is that personal loans are “unsecured loans”, which means they don’t require any collateral, are commonly used to cover emergency expenses, and usually are offered for smaller amounts ($1000 to $30000—but some do offer higher amounts).

Since personal loans are unsecured, approval, loan amount and interest rate all depend on credit worthiness. But according to credit bureau Experian, “even for the most creditworthy applicants, personal loans tend to have higher interest rates than HELOCs.”

A HELOC (or Home equity line of credit), on the other hand, serves as a revolving line of credit, typically taken out in addition to your existing first mortgage, and lets you borrow against your available home equity with your property as collateral. This means HELOCs tend to offer higher loan amounts, especially at a time with record home values in many neighborhoods.

Many homeowners love HELOCs because it allows them to access their home’s equity without touching their low first mortgage rate. That’s because a HELOC is considered a second mortgage and will have its own term and repayment schedule, separate from your first mortgage. Want to learn more?

Homeowners also value the flexibility a HELOC offers them. Since you don’t have to access the entire amount you are approved for, you only pay interest on the funds you “draw” out of your HELOC. For instance, if your HELOC is approved for $300,000 but you only access $100,000, you will only have to pay back with interest on the $100,000.

Seen side by side, many homeowners opt for HELOCs over Personal Loans:

1. HELOCs offer lower rates and larger loan amounts
2. HELOCs give you flexibility: you only pay interest on what you borrow
3. HELOC interest payments may be tax deductible, depending on what you use them for (home improvement, for instance)

In the end, HELOCs tend to be a great option if you need to access funds—but at different times (as opposed to all at once). For example, consolidating higher-interest rate debt on other loans such as credit cards. If you're interested in learning more, we’re happy to help you better understand and explore your options.