A home equity line of credit, often referred to as a HELOC, and a personal loan are two financing options for Canadians who need extra cash. That’s about where the similarities end, however.
HELOCs and personal loans are quite different in terms of qualification requirements, costs and repayment options. The option that’s right for you will depend on your financial profile, available collateral and how you plan to use the money.
What is a HELOC?
A HELOC is a type of secured loan available to homeowners. The equity in your home is used as a guarantee that you will pay back the entirety of the loan.
HELOCs are a form of revolving credit, which means once you pay back the borrowed money, you can borrow more (up to the maximum pre-determined limit) without having to reapply for another loan. Credit cards are another common form of revolving credit. Interest rates on HELOCs are typically variable.
There are no restrictions on how you can use the money borrowed using a HELOC, but two common uses are to fund projects that increase the value of one’s home or to consolidate debt.
Two types of HELOCs are common in Canada. The first type is combined with your mortgage. The second type is a stand-alone financial product, like having a second mortgage.
What is a Personal Loan?
A personal loan is a lump sum of money offered by a lender, like a bank, credit union or alternative financial institution. Personal loan funds can be used for whatever you like, but you are required to pay back the amount with interest on a set schedule over a predetermined loan term.
Unlike a line of credit, a personal loan does not allow you to continue borrowing funds as you make payments. If you would like to borrow more money again after paying back your personal loan, you will need to re-apply.
HELOCs vs personal loans
|Common types||Primary mortgage/HELOC combo.|
|Secured and unsecured loans.
Debt consolidation loans.
Home improvement loans.
Retirement savings loans.
Major purchases (wedding, funeral, etc).
|Consolidating debt, buying a car, paying for school expenses, making home repairs or improvements, covering emergency/unforeseen expenses.|
|Where to get||Most major banks, credit unions and mortgage lenders.||Banks.
Some alternative lenders.
|Typical loan limits||Up to 65% of your home’s value.||Up to $50,000, depending on lender.|
|Typical interest rates||Between 3% and 10%, depending on lender and credit profile.||Around 10% on average, depending on lender and credit profile.|
|Qualification requirements||Proof of current home value (via professional appraisal).|
20%-30% home equity (or equivalent down payment).
Acceptable credit history and score.
Ability to pass mortgage stress test.
|Credit history and score, age of majority, permanent address, proof of employment and income.|
How to choose between a HELOC and a personal loan
To figure out which financing option is best for your needs, ask yourself the following questions:
Do you have ample home equity? If you don’t own real estate, a HELOC won’t be an option, because you won’t be able to offer equity as collateral; consider a personal loan instead. If you do own real estate, you’ll need to be sure you have enough home equity — you’ll need at least 20% for a HELOC in Canada. Keep in mind that tapping into your equity means your home is on the line if you fail to repay the loan according to its terms. If you’d rather not risk it, a personal loan might be the better option.
What are your goals? If you’re looking to cover a one-time expense, and you’re certain the exact cost will be less than $50,000, a personal loan will probably do the job. But if, for example, you hope to complete several major home improvements, and you plan on tackling them over the course of a year or so, a HELOC might be a better option. Since HELOCs are revolving credit, it’s easier to use them for expenses where the final dollar amount is uncertain.
What interest rate do you want to pay? HELOCs are secured which means that they typically offer lower interest rates than unsecured personal loans, so long as your credit score is sufficient. However, the unsecured personal loan options may be preferable if you don’t have access to collateral — like a house — or just don’t want to risk it.
Alternatives to HELOCs and personal loans
If you are not approved for a personal loan or a HELOC there are other options. These can include:
Personal loans are funded quickly and feature lower interest rates than credit cards, but may be too restrictive for major home improvement projects.