{"id":25622,"date":"2023-02-27T14:49:03","date_gmt":"2023-02-27T22:49:03","guid":{"rendered":"https:\/\/www.nerdwallet.com\/ca\/?page_id=25622"},"modified":"2023-02-27T14:49:05","modified_gmt":"2023-02-27T22:49:05","slug":"personal-line-of-credit-vs-home-equity-loan","status":"publish","type":"page","link":"https:\/\/www.nerdwallet.com\/ca\/loans\/personal-line-of-credit-vs-home-equity-loan","title":{"rendered":"Personal Line of Credit vs Home Equity Loan: How to Choose"},"content":{"rendered":"\n

Personal lines of credit and home equity loans are both ways to borrow money. A line of credit borrows money from a financial institution, while a home equity line essentially allows you to borrow money from yourself.\u00a0<\/p>\n\n\n\n

Knowing which one of these financing options is right for your situation will depend on your credit score and debt, how much money you need to borrow and whether or not you own a home with equity that might be tapped.<\/p>\n\n\n\n

How a personal line of credit works<\/h2>\n\n\n\n

A personal line of credit<\/a> is a type of revolving credit that works similarly to a credit card.<\/p>\n\n\n\n

Funds from a personal line of credit can be drawn, paid off and then withdrawn again continuously as long as you make your required monthly payments. <\/p>\n\n\n\n

Interest rates<\/a> on a line of credit are usually variable (though it may be possible to get a fixed rate) and fluctuate based on changes to your lender\u2019s prime rate.\u00a0<\/p>\n\n\n\n

Getting approved for a line of credit, and the interest rate you\u2019re offered, is contingent on your credit score, income, current debt load and other factors. <\/p>\n\n\n\n

It\u2019s worth noting that a line of credit is not normally secured. The most common way to get a secured line of credit is by using your home as collateral, which is known as a home equity line of credit<\/a>, or HELOC.\u00a0<\/p>\n\n\n\n

How a home equity loan works<\/h2>\n\n\n\n

In Canada, a home equity loan<\/a> is sometimes referred to as a second mortgage. Home equity loans are different from HELOCs (though the two are often confused, as both are ways to tap into the equity you\u2019ve built in your home). <\/p>\n\n\n\n

A home equity loan gives you a one-time, lump-sum payment that you then pay back according to a set monthly repayment schedule, much like your mortgage.\u00a0<\/p>\n\n\n\n

With a home equity loan, you\u2019re typically eligible to borrow up to 80% of the value of your home minus any remaining balance you still owe on your original mortgage. If you get a home equity loan, you\u2019ll be responsible for making payments on both your first and second mortgages<\/a> at the same time.<\/p>\n\n\n\n

Interest rates can be fixed or variable on a home equity loan. To compensate creditors of second mortgages for taking on a greater risk, interest rates for home equity loans tend to be higher than on first mortgages or on lines of credit. Because of this, home equity loans are usually sought by people with lower credit scores or less equity, which may put a HELOC or other alternatives out of reach. <\/p>\n\n\n\n

Home equity loans vs personal lines of credit<\/h2>\n\n\n\n
\n\n\n\n\t\n\n\t\n\t\n\t\n\t\n\t\n\t
<\/th>Home equity loan<\/th>Personal line of credit<\/th>\n<\/tr>\n<\/thead>\n
Common uses<\/strong><\/td>Large purchases with a predictable budget.
\n
\nDebt consolidation.<\/td>		Large purchases where the budget might change over time, such as home renovations.
\n
\nDebt consolidation.
\n
\nEmergency expenses.<\/td>\n<\/tr>\n
Where to get it<\/strong><\/td>Banks, credit unions and some alternative lenders<\/td>Banks, credit unions and some alternative lenders<\/td>\n<\/tr>\n
Typical loan repayment terms<\/strong><\/td>Between 5 and 30 years.<\/td>Ongoing.<\/td>\n<\/tr>\n
Typical loan limits<\/strong><\/td>Up to 80% of a home's value, minus any balance that remains on the first mortgage.<\/td>$5,000 to $50,000 <\/td>\n<\/tr>\n
Typical interest rates<\/strong><\/td>10% to 15%, depending on the lender and borrower's credit profile.<\/td>Typically a few percentage points higher than a bank\u2019s prime rate, though introductory rates equal to prime may sometimes be available. Alternative lender rates can be as high as 46%.<\/td>\n<\/tr>\n
Typical qualification requirements<\/strong><\/td>A reasonable amount of equity in your home and not too much debt. Your income and credit score will also be considered.<\/td>Acceptable credit score and history, proof of sufficient income, reasonable debt service ratios.<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<\/div><\/div>\n\n\n\n

Home equity loan vs personal line of credit: Which is right for you?<\/h3>\n\n\n\n

Here are some things to consider if you\u2019re not sure whether to go with a home equity loan or a personal line of credit:<\/p>\n\n\n\n

Home equity. <\/strong>Do you own a home, and if so, have you built up sufficient equity to borrow against? If not, a home equity loan isn\u2019t an option for you.<\/p>\n\n\n\n

Interest rates. <\/strong>Interest rates can be very high on home equity loans because lenders take on more risk. Are you willing to pay those extra charges?<\/p>\n\n\n\n

Credit score.<\/strong> If you\u2019re a homeowner whose score is on the lower side, you may have more luck getting a home equity loan than a personal line of credit. <\/p>\n\n\n\n

Fees.<\/strong> Home equity loans tend to come with lots of additional fees compared to personal lines of credit. Fees include things like appraisal and legal expenses.<\/p>\n\n\n\n

Risk of default.<\/strong> You assume more risk when you take out a home equity loan compared to a personal line of credit, because the lender can take possession of your property if you can’t make the payments.<\/p>\n\n\n\n

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\n\t\t\tAbout the Author\t\t<\/h4>\n\n\t\t\t\t\t
\n\t\t\t\t\t\t\t\t\t\n\t\t\t\t\t\t\n\t\t\t\t\t<\/a>\n\t\t\t\t\n\t\t\t\t
\n\t\t\t\t\t\n\t\t\t\t\t\tSandra MacGregor<\/strong>\n\t\t\t\t\t<\/a>\n\n\t\t\t\t\t
\n\t\t\t\t\t\t\t\t\t\t\t\t\t

Sandra MacGregor is a freelance writer who has been covering personal finance, investing and credit cards for over a decade. Her work has appeared in a variety of publications like…<\/p>\n\t\t\t\t\t\t\t\t\t\t\t\t\n\t\t\t\t\t\t\tRead more about Sandra MacGregor and explore their articles<\/span>\n\t\t\t\t\t\t<\/a>\n\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t<\/div>\n\t\t\t<\/div>\n<\/div>\n\n\n\n\t

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\n\t\t\t\tDIVE EVEN DEEPER\t\t\t<\/h4>\n\t\t\n\t\t
\n\t\t\t
\n
\n\t
\n\t\t\t\n\t\t\"Personal\t<\/a>\n\t\t\t
\n\t\t\t\n

\n\t\n\t\tPersonal Loan vs. Line of Credit: How to Choose\t<\/a>\n<\/h4>\n\n\t
\n\t\t

The difference between a line of credit and a loan is that a loan is borrowed as a lump sum, while a line of credit can be used and repaid on an ongoing basis.<\/p>\n\t<\/div>\n\n\t

\n\t\t\t\t
\n\t\t\t\n\t\t\t
\n\t\t\t\t\"\"Sandra MacGregor<\/a>\"\"Clay Jarvis<\/a>\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t<\/div>\n\t\t<\/div>\n\t<\/div>\n<\/div>\n<\/div>
\n
\n\t
\n\t\t\t\n\t\t\"What\t<\/a>\n\t\t\t
\n\t\t\t\n

\n\t\n\t\tWhat Is Home Equity?\t<\/a>\n<\/h4>\n\n\t
\n\t\t

Home equity is the market value of your house minus what you owe on your mortgage. <\/p>\n\t<\/div>\n\n\t

\n\t\t\t\t
\n\t\t\t\n\t\t\t
\n\t\t\t\t\"\"Kurt Woock<\/a>\"\"Barry Choi<\/a>\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t<\/div>\n\t\t<\/div>\n\t<\/div>\n<\/div>\n<\/div>
\n
\n\t
\n\t\t\t\n\t\t\"Types\t<\/a>\n\t\t\t
\n\t\t\t\n

\n\t\n\t\tTypes of Loans Available in Canada\t<\/a>\n<\/h4>\n\n\t
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Common loan types include personal loans, home loans and student loans. Knowing how different types of loans work in Canada can help you choose the right option for your goals.<\/p>\n\t<\/div>\n\n\t

\n\t\t\t\t
\n\t\t\t\n\t\t\t
\n\t\t\t\t\"\"Kurt Woock<\/a>\"\"Sandra MacGregor<\/a>\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t<\/div>\n\t\t<\/div>\n\t<\/div>\n<\/div>\n<\/div>
\n
\n\t
\n\t\t\t\n\t\t\"Debt\t<\/a>\n\t\t\t
\n\t\t\t\n

\n\t\n\t\tDebt Consolidation Loan vs Personal Loan: How to Choose\t<\/a>\n<\/h4>\n\n\t
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A debt consolidation loan and personal loan have many similarities, but may differ on qualification requirements, collateral requirements, interest rate and loan limit.<\/p>\n\t<\/div>\n\n\t

\n\t\t\t\t
\n\t\t\t\n\t\t\t
\n\t\t\t\t\"\"Hannah Logan<\/a>\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t<\/div>\n\t\t<\/div>\n\t<\/div>\n<\/div>\n<\/div>\t\t<\/div>\n\t<\/section>\n\n","protected":false},"excerpt":{"rendered":"

A personal line of credit is a type of revolving credit that works similarly to a credit card, and a home equity loan is a lump-sum loan for homeowners.<\/p>\n","protected":false},"author":12,"featured_media":25629,"parent":15647,"menu_order":0,"comment_status":"closed","ping_status":"closed","template":"page-templates\/article-sidebar.php","meta":{"_acf_changed":false,"om_disable_all_campaigns":false,"apple_news_api_created_at":"","apple_news_api_id":"","apple_news_api_modified_at":"","apple_news_api_revision":"","apple_news_api_share_url":"","apple_news_coverimage":0,"apple_news_coverimage_caption":"","apple_news_is_hidden":false,"apple_news_is_paid":false,"apple_news_is_preview":false,"apple_news_is_sponsored":false,"apple_news_maturity_rating":"","apple_news_metadata":"\"\"","apple_news_pullquote":"","apple_news_pullquote_position":"","apple_news_slug":"","apple_news_sections":"\"\"","apple_news_suppress_video_url":false,"apple_news_use_image_component":false,"footnotes":"","_nw_pros_cons_block_schema":""},"content-classification":[337],"topic":[338],"cluster":[339],"pp_author":[24],"acf":[],"apple_news_notices":[],"yoast_head":"\nPersonal Line of Credit vs Home Equity Loan: How to Choose - 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