Why a Home Equity Line of Credit is Better Than a Personal Loan?

Having no savings and/or living on a fixed income can make it hard to make large purchases.

For many people in such a predicament, a loan may be the only way to get the help they need. Most people who need a loan will turn to either a line of credit or personal loan for relief.

By knowing the difference between a personal loan and a line of credit, you will be able to choose the option that is better suited to your needs.

How Does a Home Equity Line of Credit Differ from a Personal Loan or Line of Credit?

A home equity line of credit (HELOC) is a second mortgage and a revolving line of credit. Your property’s value will determine the amount that can be borrowed against it, and your property will be used as collateral in the event that you are unable to pay back the loan.

HELOCs often have fairly low interest rates, and the amounts that are offered tend to be quite large. Monthly payments are kept low during the draw period, and you will only need to pay interest on the amount of capital that you borrow. 

However, interest rates may be variable, and the approval process may take quite a bit of time.

A personal line of credit, conversely, is unsecured, meaning your home will not be used as collateral in order to secure the loan. As such, interest rates tend to be higher in order to offset some of the risk that is incurred by the lender.

However, the interest rates tend to be much lower than what is typically charged for credit card loans, with rates usually ranging between 6% and 8%.

Personal loans are usually considered installment loans that have fixed repayment terms as well as fixed interest rates. They are also usually unsecured. A personal loan is less flexible when compared to many other financing options.

The amount that you receive will be fixed, and will be provided in a lump-sum payment. As soon as you receive the money, you will start paying interest on it, and you will need to pay it off over a set period of time under the terms and conditions of your lender.

Rates are also usually contingent on how good your credit score is, with rates ranging from 6.5% to 17%. The advantages of a HELOC are numerous when compared to personal loans, as we shall see below.

What Are the Advantages of a Home Equity Line of Credit?

Not only do HELOCs include a lower interest rate than many unsecured forms of debt, such as credit card debt, but the rate is also fixed, providing financial stability and peace of mind.

The amount that is provided is also offered in a lump sum. The end result is you will have more flexibility in order to fund larger expenses, such as a home remodeling project. You can even ameliorate your credit report.

That is, you will improve your credit score by making complete and timely home equity line of credit payments. In regards to the interest that you pay on your HELOC, it may actually be tax-deductible.

For instance, you may receive a tax-deduction if you decide to use the money to renovate your property. Please speak to your accountant to learn more about HELOC tax-deductions that you can benefit from.

Flexibility is yet another benefit, as you will be able to withdraw funds whenever you need it. There is a limit, but you can borrow within your pre-designated maximum in order to fund a myriad of different projects.

You will also enjoy lower fees when you take on a HELOC. You may not have to pay any appraisal or application fees in certain cases, and closing costs tend to be lower vis-a-vis other loan types.

What are the Best Ways to Use a Home Equity Line of Credit?

You can use the funds that you receive to pay for your dream wedding, for instance. The money can be used in order to renovate or update your home, or it can be put towards your college expenses. 

You can also use the money to consolidate (combine) your loans in order to make payments more manageable and affordable. You can even use the money to cover emergency expenses, such as an illness or a sudden death in the family. 

Additionally, the money can even be put towards business expenses, such as starting a new business.

Conclusion

A HELOC tends to have a rate that is based on the variations of an index (i.e., prime rate), and tends to be flexible. They can also be used to fund virtually anything that you desire, including medical expenses, home remodeling, and the wedding of a lifetime.