Personal line of credit vs HELOC

A personal line of credit and a home equity line of credit (HELOC) both provide access to a revolving line of credit. But while similar in many ways, there are also some key differences between the two—most notably, a HELOC is secured by the equity in your home.

Keep reading for a side-by-side personal line of credit vs HELOC comparison to help you decide which credit option is right for you.

Quick summary: personal line of credit vs HELOC

	Personal line of credit	HELOC
Is it secured or unsecured?	Usually unsecured	Secured by the equity in your home
How much can I borrow?	Up to $50,000 (more in some cases)	Up to 65% of your home’s value
What can I use it for?	Any legitimate purpose	Any legitimate purpose
Where can I get it?	Mostly banks and credit unions, some online lenders	Mostly banks and credit unions
Loan terms	Ongoing	Ongoing
Interest rates	Usually variable	Variable
How to apply	Online or at a branch	Online or at a branch

What is a personal line of credit and how does it work?

A personal line of credit works a lot like a credit card, but it has a lower interest rate and a higher credit limit. It’s a revolving line of credit that you can access whenever you need up to a predetermined limit. Interest rates are usually variable, and you only pay interest on the money you borrow. It’s easy to access your personal line of credit funds by making an ATM withdrawal, writing a cheque or by transferring money via online or mobile banking.

There’s no fixed repayment period with a personal line of credit, but once you repay the money you borrow, it becomes available for you to access again as needed. Personal lines of credit are usually unsecured, but you’ll get a better rate and a higher limit if you provide collateral for the loan.

You can use the funds from a personal line of credit however you want, including paying for home renovations, a vacation, medical bills or a new car.

Related: Line of credit interest rates

Why should I get a personal line of credit?

There are several reasons why a personal line of credit might be the right choice for you.

• No collateral required. Unlike a HELOC, you don’t have to provide an asset as security for a personal line of credit.
• Lower interest rate than a credit card. Lines of credit typically come with lower interest rates than credit cards, making them a more affordable option.
• Easy access to funds when needed. Because this option provides revolving credit, you can withdraw cash from your line of credit whenever you want.
• Flexible. If you’re unsure how much money you’ll need to cover upcoming expenses—if you’re renovating your home, for example—a line of credit provides greater flexibility than a lump-sum personal loan.

What to watch out for

• Risk of unnecessary spending. Just because you have credit available, it doesn’t mean you should use it, so be wary of spending more than you need to (or more than you can afford to repay).
• Fees. Check the fine print to find out whether any admin, ongoing or late payment fees apply.
• Rising interest rates. If interest rates rise, your line of credit repayments will rise too.

What is a HELOC and how does it work?

A HELOC is a home equity line of credit. It provides a revolving line of credit that you can access when needed. Interest is variable, and there’s no fixed repayment period.

Just like a personal line of credit, the funds from a HELOC can be used to pay for just about anything. And the money you repay goes back into your credit line, so it’s available for you to access again when needed.

But the key difference between a HELOC and a personal line of credit is that a HELOC is secured by the equity in your home. A HELOC can be combined with your mortgage or exist as a standalone product, and credit limits of up to 65% of your home’s value are available. This means that you can access larger amounts than with a personal line of credit.

Tapping into your home equity reduces the risk for the lender, so you can access a higher credit limit and a lower interest rate than with an unsecured loan. The downside is that it increases the risk for you—if you can’t keep up with repayments, the lender can repossess or sell your home.

Why should I get a HELOC?

If you own your home, there are several reasons why a HELOC might be a good choice.

• Higher credit limits. You can access a larger credit amount with a HELOC than with an unsecured line of credit.
• Competitive rates. Providing your home equity as collateral will help you access a lower interest rate.
• Less-than-perfect credit is OK. You may be able to qualify for a HELOC if your credit history is less than perfect, but you’ll need to have sufficient income to manage repayments.
• Flexible access to funds. You can take advantage of quick and easy access to funds whenever you need.

What to watch out for

• You need to own your home. If you’re renting, you’ll need to consider an unsecured line of credit instead.
• You put your property at risk. The lender could seize your home if you can’t make repayments, so a HELOC is not suitable for everyone.
• Watch out for fees. Appraisal fees, title search fees, legal fees and origination fees may apply, so read the fine print carefully.
• Rising interest rates. Rates are variable, so the cost of repayments will increase if interest rates rise.
• Hard to switch lenders. If your HELOC is combined with a mortgage and you want to switch to a different lender, you may have to repay your HELOC in full before you can do so.
• Overspending. Just like with a personal line of credit, you’ll need to be careful to avoid spending too much.

Personal line of credit vs HELOC: Which is right for me?

There are several good reasons why you might choose a personal line of credit over a HELOC and vice versa. Both products offer flexible access to funds and lower interest rates than a credit card, providing convenient solutions to help you manage ongoing expenses.

The benefits of a HELOC are simple: you can qualify for a larger credit amount and a better interest rate than with an unsecured line of credit. The downsides are that you can potentially take on a higher level of debt, and you risk losing your home if you can’t keep up with repayments.

So if you don’t own a home or you don’t want to put your home at risk by using it as collateral, a personal line of credit may be a better option.

Ultimately, the right choice for you depends on your personal financial situation and what you’re willing to risk.

Compare personal lines of credit

Bottom line

If you need flexible access to extra cash, a personal line of credit and a HELOC are both viable options—but both have pros and cons. Compare the benefits and drawbacks of each before deciding on the winner of your HELOC vs personal line of credit comparison.

Frequently asked questions

• Is a HELOC better than an unsecured line of credit?

  In a direct HELOC vs personal line of credit comparison, both options have pros and cons. HELOCs provide larger credit limits and lower interest rates, but the lender could repossess your home if you can't afford repayments. While an unsecured line of credit may have a higher interest rate, it doesn't come with the risk of losing your home. You'll also need to be a homeowner with sufficient equity in your home to qualify for a HELOC.

• What is home equity?

  Home equity is the difference between the market value of your home and how much you owe on your mortgage. So, if your home is valued at $800,000 and you have a $200,000 mortgage balance, you have $600,000 equity in your home.

• What is the disadvantage of a HELOC?

  The biggest disadvantage of a HELOC is that the lender can repossess your home if you fail to make repayments. Other drawbacks include HELOC fees and the potential to take on a high level of debt.