HELOC vs. Personal Loan: Which Is Right For You?

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If your budget is feeling a bit tight these days, you may find yourself wondering if there’s a financing option that could improve your situation. Learning the differences between personal loans and home equity solutions will let you to weigh out the pros and cons of each, leading you to a lending option that best suits your financial goals.

In this post, we’ll cover the basics of HELOCs and personal loans to give you the knowledge you need to decide whether or not to pursue either of these options.

What Is A HELOC?

A Home Equity Line of Credit (HELOC) is a loan where the borrower receives a revolving line of credit by using the available equity in their home as collateral. Typical HELOC terms can last anywhere between 15 and 20 years and offer competitive variable rates.

Reasons To Consider A HELOC

Evaluating the “pros” of a HELOC comes down to factors such as how much you’re looking to borrow and for how long. Using the equity in your home as collateral reduces the risk for your bank or credit union, allowing them to offer lower rates and longer terms when compared to alternative financing options. HELOCs are also known for their flexibility. Unlike loans where the borrower receives their funds all at once, a Home Equity Line of Credit allows you to use only what you need when you need it, on a revolving basis, during the draw period.

Why A HELOC Might Not Be Right For You

We mentioned as a benefit that HELOCs offer lower rates; however, these rates are variable which in some cases can be seen as a negative, particularly in a rising rate environment. If consistent and predictable payments over the life of your loan are essential to your financial goals, then a HELOC might not be the right option for you.

When it comes HELOCs, you’re getting a financing option that offers more flexibility over a longer period. It’s worth pointing out that many lenders will require a minimum loan amount, necessitating the longer loan term. So, if a shorter-term solution is what you’re in the market for, this may not be the best option for your specific goals.

What’s A Personal Loan?

Personal loans are what people typically think of when they’re “going down to the bank to get a loan”. These loans typically offer short to moderate-term repayment options, rates tied to your credit worthiness, and fairly quick funding from the time of applying.

Benefits of Choosing A Personal Loan

Due to the flexibility in terms and borrowing limits, personal loans are a great lending option for when the unexpected occurs and extra cash is needed quickly.

While personal loan rates reflect an individual’s qualifications, they are typically fixed at the moment they’re funded, making them a great option for those who like predictability in their monthly payments.

Given the flexibility and variability of personal loans, you’ll often find collateral is not required for well-qualified borrowers. This presents a great opportunity for borrowers who wish to avoid the closing costs associated with mortgage-related loans as well as those with strong credit, but lacking assets with the needed equity.

Situations Where A Personal Loan Isn’t The Best Choice

Due to the lack of collateral and typically shorter lending terms for personal loans, these options typically carry higher interest rates than other loans. So, if your goal is keeping interest at bay and/or a longer repayment period, a personal loan may not be the best option for your borrowing needs.

If you’re seeking a loan option that offers the cash you need now and while maintaining the “nest egg” you may need later, personal loans may not suit your lending needs. Unlike a HELOC, personal loans are paid out in a single lump sum and repayment begins immediately, whether you’ve used the borrowed funds or not.

HELOC vs. Personal Loan: Which Is Right For You?

Regardless of your financial goals, understanding your borrowing options is sure to lead to making more informed, confident decisions. If you’re evaluating your financing needs and would like to speak to a lending professional, that’s what we’re here for! Visit any of our convenient branch locations or give us a call at 804-274-1200. We’re happy to help you decide which options are best for you and your goals.

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