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Should I get a Personal Loan or HELOC?

06/08/2020 - Responsibly Borrowing & Managing Credit, Smart Home Buying & Ownership

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When it comes to choosing the right lending option, it’s important to make the right decision for your financial needs. If you’re a homeowner shopping around for a loan, you have two borrowing options, a home equity line of credit or a personal loan. Each have different benefits depending on what you hope to achieve with the money. But how do you know which one you should choose? Let’s take a closer look at home equity lines of credit vs. personal loans.

Borrowing with a Home Equity Line of Credit (HELOC)

A HELOC is a borrowing option that leverages the equity in your home. Applying for a HELOC may be the right decision if you’ve lived in your home for some time and made regular mortgage payments, building equity over time. This is the primary difference between a HELOC vs. a personal loan. However, a HELOC is also structured differently than a personal loan.

HELOCs are structured using your home as collateral. With a HELOC, the amount of credit you qualify for is based on the equity built up in your home. The cash from a HELOC is also distributed differently than other loan options, too. You’ll receive the line of credit during a draw period, which means you can borrow and repay as needed. During the draw period, you’re only required to pay interest on the balance you have drawn. At the end of the draw period, you’ll start making regular payments of principal and interest to pay off the balance of the loan.

In addition, when deciding between a HELOC vs. personal loan, a HELOC is sometimes easier to qualify for and may offer lower interest rates than personal loan options and even some credit cards. You will need at least 20% equity in your home and good credit to apply for a HELOC. Also, how you use a HELOC is sometimes different than how you would use a personal loan.

How Should You Use a HELOC?

When it comes to a home equity line of credit vs. a personal loan, the way you use them matters. The best use case for a HELOC is to put the money back into your home in the form of improvements, renovations and updates. Why? If you’re leveraging your home as collateral for the loan, it’s a good idea to add to the value of your home with that money. Ultimately, you’re increasing the value of your home and, in turn, increasing the equity.

Because acquiring a HELOC is very similar to taking out a second mortgage, you can also use this influx of cash to purchase a new home or a second home. Dreaming of that beach cottage? It may just be in your future with a HELOC.

Personal Loans and How to Use Them

The main differences between a HELOC and personal loan are the collateral and borrowing structure. Personal loans are sometimes unsecured, which means they aren’t backed with any collateral, like your home. This means that the interest rates may be higher, but you’ll receive the funds much more quickly after approval. If you’re interested in a secured personal loan, which usually has lower interest rates, you will need some collateral.

Personal loan amounts are dispersed in a lump sum and you can expect to start making payments on principal and interest right away. You may also be able to apply for a personal line of credit. In this case, the only difference between a HELOC and personal line of credit is the collateral – the borrowing structure of the loan is essentially the same.

So, what can you use a personal loan to fund? You can use a personal loan to fund anything. Usually, borrowers use this type of loan to consolidate debt from credit card balances, fund a wedding, update their home or cover an emergency expense.

HELOC vs. Personal Loans and Lines of Credit: What Lending Option is Right for You?

Determining whether to apply for a HELOC vs. a personal loan or line of credit should be based on your needs. If you have equity built up in your home, a good credit score and plan to use the funds to update your home and increase equity even more, a HELOC may be right for you.

If you need a quick influx of cash to consolidate debt or fund an emergency expenditure, a personal loan or line of credit may be better suited to your circumstances. Nervous about putting your home up as collateral for the length of the loan? A personal loan may work better if this is a concern.

When you’ve decided which loan option you should apply for, it’s time to choose a lender with a trusted history of locking in competitive rates and flexible loan options. WesBanco offers home equity lines of credit, personal loans and lines of credit. Our experienced loan officers can also help you pick the best loan that best suits your needs, so you don’t have to go it alone. Have questions or concerns? We’re with you every step of the way from prepping your application to closing your loan.

Explore all of WesBanco’s personal lending options to discover which one is right for you.

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Learn More about WesBanco’s HELOC Options:

Explore HELOC

Content is for informational purposes only and is not intended to provide legal or financial advice. The views and opinions expressed do not necessarily represent the views and opinions of WesBanco.

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