HELOCs vs. personal loans: What to consider now
With inflation still a concern, if less prevalent than it was in recent years, and interest rates on borrowing products much higher than they were a few years ago, many Americans may find themselves looking for ways to make ends meet right now. If you're a homeowner, borrowing from your home equity could be one of the smarter moves to make. With products like home equity loans and home equity lines of credit (HELOCs) relatively accessible now, and with the average home equity level sitting around $313,000, borrowing from your most prized financial asset comes with multiple advantages.
But what about a personal loan instead? Personal loans could be a good option for homeowners who want to keep their home equity untouched. That said, in today's unique economic climate, there's a strong case to be made for choosing a HELOC over a personal loan, specifically. Below, we'll explain why.
Start by seeing how low of a HELOC interest rate you could secure here.
HELOCs vs. personal loans: What to consider now
Here are three big reasons why a HELOC makes more sense for borrowers than a personal loan does now:
HELOCs are much cheaper
The average personal loan interest rate is 12.37% now, making it significantly cheaper than credit cards (over 20%) – but significantly more expensive than a HELOC. HELOC rates, on average, are just 8.04% currently, and, depending on your borrower profile, you may be able to secure a rate even lower. So it's worth calculating your repayment costs tied to both rates to see how much you can save. Over a 10- or 15-year repayment period, the HELOC is likely to keep hundreds if not thousands of dollars in your pocket, depending on the line of credit amount secured.
Get started with a HELOC online today.
HELOC costs could continue to decline
A fixed interest rate is generally a benefit when interest rates are on the rise. But now, after the Federal Reserve issued three rate cuts toward the end of 2024 (and could issue more in 2025), a variable rate makes more sense. Just look at recent HELOC activity to prove the point.
HELOCs have variable rates, which declined to 18-month and two-year lows, respectively, already this year and they've since dropped even further. But if you opened a personal loan in January, for example, you'd still be stuck paying that same elevated rate. In other words, if you want to position yourself for rate savings ahead, a HELOC is more beneficial than a personal loan is likely to be this year and, possibly, multiple years ahead.
HELOCs have attractive tax benefits
Amid the height of tax season and with an April 15 filing deadline looming, homeowners may be wondering about any tax deductions they may qualify for. And while deductions for 2024 are already accounted for, if you apply for a HELOC now – and use the funds in 2025 – you may be able to deduct the interest paid on the line of credit when filing your return next year. For eligible home repairs and renovations, the IRS makes exceptions for interest paid on HELOCs (and home equity loans, too), essentially making those current HELOC interest rates even more affordable by knowing that interest paid there could reduce your tax bill in the future.
The bottom line
In a different economic climate, a strong case could be made for choosing a personal loan over a HELOC. But this isn't that economy. With interest rates much lower, the inherent potential for rates to continue to decline and attractive tax benefits that personal loans simply don't offer, many homeowners would benefit from choosing a HELOC over a personal loan now. That said, HELOCs do use your home as collateral, so be sure to carefully consider your repayment costs and affordability. If you're unable to make repayments as agreed upon, you could lose your home back to the lender.
