You cannot decide between a personal loan, HELOC, or home equity loan? To find out which loan suits you best, have a look at the differences at a glance:
|Personal Loan||Home Equity Loan||Home Equity Line Of Credit (HELOC)|
|Interest Rates||Fixed||Fixed||Variable Rates|
|Repayment Terms||1 to 10 years of fixed rates||5 to 30 years of fixed rates||1. Period (5 to 10 years): Interest-only payments 2. Period (10 to 20 years): Interest and principal|
|Loan Amount||depending on various factors||depending on home equity||depending on home equity|
|Collateral||no collateral||property as collateral||property as collateral|
|Loan Payment||lump-sum||lump-sum||revolving credit|
|Annual Percentage Rate||variable; generally higher||lower than personal loans but slightly higher than HELOCs||slightly lower than home equity loans; only on the amount you draw|
|Tax Benefits||no tax benefits||interest rates on investment in home improvement projects are tax-deductible||interest rates on investment in home improvement projects are tax-deductible|
|Optimal Use||major and minor purchases||large home improvements, debt consolidation, and major purchases||ongoing or regular home improvements, college tuition payments, and medical expenses|
Interest Rates and Repayment Terms
For both personal loans and home equity loans, fixed interest rates are set in the contract terms. These depend on various factors such as the credit history and loan amount. In the case of a home equity loan, of course, home equity is another factor.
In contrast, the interest rates of the HELOC are variable. During the first draw period of a credit line, you only have to pay the interest on the amount you actually draw but in the second phase of the repayment period, the monthly payments of the principal are added. These payments also vary with the amount withdrawn. However, because you do not make any repayments in the first phase and only withdraw money, the interest rate to be paid increases steadily. In contrast, the monthly payments for the other two loans decrease steadily as the principal is paid off.
Loan Amount and Collateral
All three loans are a way to get cash. Since the home equity loan and the home equity line of credit represent a kind of second mortgage and use the house as collateral, the amount of the loan is directly linked to the home equity. With a personal loan, on the other hand, the maximum amount depends on a variety of factors, and collateral is usually not required. With the large variety of personal loan providers, loans can be found from $1,000 to over $100,000.
With the personal loan, as with the home equity loan, the entire agreed amount is transferred to your account after the contract is signed and a certain processing time. That can range from a few hours to a few weeks, depending on the lender.
The HELOC, on the other hand, is more of a revolving loan that works like a credit card. Over a set period of time, you can withdraw money whenever you need it.
Annual Percentage Rate (APR)
Comparing the three loans at annual percentage rates is much more difficult. For personal loans, the fees and other charges vary from completely free to very expensive, depending on the provider. For the other two loans, the closing costs and other fees differ only minimally but vary between the providers as well.
Optimal Use and Tax Benefits
All three loans are not necessarily tied to purposes and can be spent freely. The personal loan can be used for all major and minor purchases. If you find a particularly favorable loan with a low-interest rate, you can also use it to pay off an existing, more expensive loan.
Likewise, a HELOC and home equity loan can be financially rewarding. If you use the loans to finance home improvements, you increase the home equity of the property and can also deduct the interest for tax purposes. Of course, you can also use the home equity loan for debt repayment or other large investments. The home equity line, on the other hand, is particularly suitable for regular payments such as medical expenses or tuition fees.
What Should You Choose?
Before you decide on one of the three loans, you should be clear about what you want exactly and what conditions you meet. Do you need cash for a one-time investment or for regularly occurring expenses?
Whatever you consider: Best Egg is here to help! Check our Straight Money Talk section for more information on home improvement financing.