HELOC vs. Personal Loan: Which is More Affordable?
If you’re thinking about borrowing money for a major purchase, home improvement, or debt consolidation, a personal loan and a HELOC may be your best options. Just like every other form of credit, both of these options have their pros and cons.
When considering these options, you might wonder which is best for you. The answer to this question can depend on several factors, such as your financial situation, loan terms, and financial habits.
If you are wondering which of the above mentioned options are more affordable, here is all you need to know to make a decision.
Interest Rates
Interest on your loan is one of the first things you consider when taking a loan. HELOC generally has lower interest rates secured by your home. However, most HELOCs have variable interest rates, which can increase or decrease with time.
On the contrary, personal loans usually have a fixed interest rate. Since these loans are not secured by an asset, such as HELOCs, the interest rates can be significantly higher.
Requirements for Collateral
If you are considering a HELOC, you must have a home to use as collateral. This means that if you default, you may risk foreclosure of your home. The best way to reduce the risk of foreclosure is to make timely payments.
You do not have to worry about collateral when it comes to personal loans from lenders. If you have a good credit score, you can get a personal loan with ease, especially as described by the financial experts at Amerisave.
Associated Costs
Interest is not the only thing you must keep in mind while choosing between HELOC and personal loans. Several other factors, such as organization fees, closing costs, and appraisal fees, need to be considered while relying on HELOC.
When it comes to personal loans, there are generally lower, and even no closing costs. However, the high interest rates can be the reason many people prefer HELOCs over personal loans.
Loan Amounts
Another thing you may be wondering is how much of a loan you can get with a HELOC and personal loans. The amount of the loan can vary based on the option you choose.
You can borrow a higher amount, usually up to 85% of your home’s value. However, the amount of the loan can be a lot lower based on your income and credit history. Hence, if you want to borrow a large amount, it is a good idea to consider a HELOC.
Flexibility of Use
When it comes to flexibility of use, HELOCs and personal loans can vary significantly. Using HELOCs, you can borrow what you need, whenever you need it throughout the draw period.
When it comes to a personal loan, you get your loan upfront. This means that no additional funds can be borrowed unless you apply again.
If you have many financial challenges to face in a certain period of time, it is best to settle for a HELOC. However, if you need a loan upfront, you must consider a personal loan.
