HELOC vs personal loan

A home equity line of credit is secured by the home and usually priced below an unsecured personal loan, because the lender can recover the debt from the property. A personal loan is unsecured, which means it cannot take the home, and it costs more as a result. The cheaper rate is not automatically the better choice, because the two carry different risks.

How each works

A HELOC is a revolving line secured by the home. The borrower draws what is needed, pays interest on the outstanding balance, and can redraw as the balance is repaid during the draw period. After the draw period the line typically converts to a repayment schedule.

A personal loan is a fixed-sum instalment loan. The borrower receives the full amount, repays it on a fixed schedule, and the rate is usually fixed. There is no draw period and no redraw, which makes the debt finite and the payment predictable.

The structural difference matters as much as the rate. A HELOC is flexible and can be redrawn, which is useful for an ongoing project and dangerous for a household that might spend the available credit again. A personal loan is a closed commitment that cannot be re-borrowed.

Source: Freddie Mac Primary Mortgage Market Survey, as published at freddiemac.com/pmms. National averages for conforming loans; your rate depends on credit, points, loan size and property.

The rate context

Secured home equity products are priced against the mortgage market. Freddie Mac publishes the national average mortgage rates that these products are benchmarked to, and the table below is that survey. It is a national average, not your rate.

Unsecured personal loans are priced against a benchmark such as the bank prime rate. The Federal Reserve H.15 bank prime loan rate is the reference many consumer lenders use, and it is used in the worked example below. The gap between the two is the price of keeping the home out of the transaction.

A HELOC is frequently a variable-rate product, while a personal loan is frequently fixed. That difference means the HELOC's cost can rise with rates while the personal loan's cannot, which is a risk that does not show up in the initial comparison.

The total cost comparison

The example below uses the Federal Reserve H.15 bank prime loan rate and a standard amortising schedule. It is arithmetic from a published rate, not a quote, and it gives you a benchmark for an unsecured offer.

Worked example, with the assumption stated: $20,000 borrowed at the Federal Reserve H.15 bank prime loan rate of 6.75% (published 2026-09-16) repaid over 60 months on a standard amortising schedule. That gives a monthly payment of $393.67, total interest of $3,620.15 and a total repayment of $23,620.15. This is arithmetic from a published rate, not a quote: a real APR includes fees and is set by the lender from your credit, so your figures will differ. A secured HELOC at a lower rate would cost less in interest, but it puts the home at risk on default. Compare the two over the same term and include any closing costs on the HELOC.

A HELOC may carry closing costs, an annual fee or a cancellation fee, and those belong in the comparison. A lower rate with a large upfront fee can cost more than a higher rate with no fee over a short horizon.

The risk that decides it

A HELOC converts unsecured borrowing into secured borrowing. In the worst case an unsecured debt can be discharged in bankruptcy, while a secured debt can cost the home. That is not a reason never to use a HELOC, but it is the reason to size the line so the payment survives a loss of income.

The redraw feature is the second risk. A borrower who clears a HELOC and then redraws it has not reduced the debt, and the available credit can become a permanent temptation. A personal loan removes that option by design.

A variable rate is the third risk. If rates rise, the HELOC payment rises, and the borrower may not be able to refinance if the home has fallen in value. A fixed-rate personal loan has no such exposure.

When each is the better choice

A HELOC is often the better choice for a large, ongoing project with uncertain timing, such as a renovation, because the borrower draws only what is needed and pays interest only on the drawn amount. It can also be cheaper for a large balance over a long term if the rate is low and fixed costs are modest.

A personal loan is often the better choice for a one-time expense with a known amount, for a household with little equity, or for a borrower who wants the discipline of a fixed payment and no redraw. It is also the only option if the home is already heavily encumbered.

A third option is a fixed-rate home equity loan, which is secured like a HELOC but paid like a personal loan. It can combine the lower secured rate with the predictability of a fixed instalment, and it is worth asking about.

• Compare the total cost over the same term, including fees.
• Ask whether the rate is fixed or variable.
• Ask whether there is a prepayment penalty.
• Size the payment so it survives a loss of income.
• Ask what happens when the draw period ends.

Before you sign

Ask for the total cost of credit in writing: the amount borrowed, the finance charge, the annual percentage rate, the payment schedule and the total of payments. In the United States this is the Truth in Lending disclosure; in Canada, federally regulated lenders must disclose the cost of borrowing and the APR.

Check whether the HELOC has a balloon or a conversion feature at the end of the draw period. A payment that is interest-only during the draw period and fully amortising afterwards can rise sharply, and that schedule should be understood before signing.

If the home is the collateral, ask what happens if the value falls and whether the lender can reduce or freeze the line. A frozen line is a real risk in a falling market, and it can leave a borrower mid-project without the funds they were counting on.

Where these figures come from

Related pages

• Home equity costs
• Personal loan costs
• Debt consolidation: when it works
• Loan payment calculator

Frequently asked questions