Personal loan vs. HELOC: What’s right for you?

There are plenty of options available to Canadians looking to borrow money, and each has its own pros and cons. Two of the most common choices are personal loans and home equity lines of credit (HELOCs). Both can help cover large expenses from home repairs to debt consolidation, but they work very differently. 

So, how do you know which is right for you?

Let’s break it down so you can make the smartest choice for your situation.

A personal loan is a lump sum of money you borrow from a bank, credit union, or online lender, which you agree to repay over a fixed term (usually between one and five years) with regular payments and interest.

There are two types of personal loans: secured and unsecured. A secured loan is backed by an asset, like your car or home. If you default, the lender can take that asset. Unsecured loans don’t require collateral but usually come with higher interest rates, since there’s more risk for the lender.

You can use a personal loan for all kinds of things, including:

• Consolidating high-interest credit card debt
• Handling emergency expenses
• Financing big purchases, like weddings or home upgrades

In Canada, personal loans typically max out at $50,000. Interest rates are usually fixed, which means your rate – and your monthly payments – stay the same over the life of the loan, which makes budgeting easier. With a variable-rate loan, your payments would go up or down depending on changes to your lender’s prime rate.

Because personal loans come with predictable payments and a clear end date, they’re a good fit if you like structure, or just want to avoid surprises.

If you’re a homeowner looking to borrow funds to cover one-time expenses like a kitchen renovation or roof repair, this might be your best bet. 

A home equity line of credit, or HELOC, is a revolving credit line that uses your home equity as collateral. Think of it like a giant credit card, but instead of a spending limit based on your credit score, it’s based on how much equity you’ve built in your home.

How does that work? 

Let’s say your home is worth $600,000, and you have $300,000 left on your mortgage. That means you have $300,000 in equity. 

Most lenders will let you borrow up to 65% of your home’s value, minus what you still owe on your mortgage. 

In this case, 65% of $600,000 is $390,000. Subtract the $300,000 mortgage, and you could access a HELOC of up to $90,000.

You don’t need to have a mortgage to qualify for a HELOC, but if you do have a mortgage, you don’t have to get a HELOC from the same lender. You can shop around and apply through a different financial institution, though doing so might involve extra paperwork or legal fees.

HELOCs are flexible. You can borrow, repay, and borrow again as needed. Payments are usually interest-only during the draw period, and rates are variable. That means they’ll move with the prime rate set by your lender, so if rates go up, so do your interest payments.

HELOCs are often used for:

• Renovations and home improvements
• Education costs
• Investment opportunities
• Ongoing expenses that don’t fit into a single lump sum

A word of caution: since your home is on the line, you need to be disciplined about how much you borrow and how you repay it.

Personal loans and HELOCs have both similarities and differences. Here is a quick glance at their main differentiators: 

There’s no clear-cut winner when it comes to choosing between a personal loan and a HELOC. The right product depends on your personal finances, goals, and risk tolerance.

As you weigh the pros and cons, ask yourself:

• What’s the loan for? If it’s a one-time cost, a personal loan may be simpler. If you’ll need access to funds over time, a HELOC could be better.
• Do I own a home and have equity in it? You need decent home equity to qualify for a HELOC.
• What’s my credit score? Better credit gets you better rates on both. For HELOCs, lenders may also look at your income, debt load, and property value.
• Am I comfortable with variable rates? The interest rates on HELOCs can rise. If you’re already feeling squeezed, a fixed-rate personal loan may be easier to manage.
• What’s my risk tolerance? If you miss HELOC payments, you could lose your home. Personal loans don’t carry that same risk.

Examples of when either option would be best:

Here are some examples:

If you want to consolidate $20,000 of credit card debt at 19%, it’s time to look into personal loans. A personal loan at 9% with regular payments may save you money and simplify your life.

If you’re renovating your kitchen over several months and don’t know the exact cost, consider a HELOC. It will give you the flexibility to draw only what you need, when you need it.

Whatever your situation, it’s wise to chat with a mortgage broker or financial advisor before making a decision. They can help you compare options and make sure you understand the fine print.

Not quite sure either option fits? You might consider:

• Home equity loan: Like a HELOC, it’s secured by your home, but you get a lump sum with a fixed rate and term. It’s a middle ground between a HELOC and a personal loan.
• Personal line of credit: These are similar to a HELOC in that they’re revolving, but they’re unsecured. Rates tend to be higher than a HELOC, but there’s no risk to your home.

Each option has its place – it just depends on what you need and how you plan to repay it.

When it comes to choosing between a personal loan and a HELOC, the best option is the one that fits your budget, lifestyle, risk tolerance, and financial goals.

Personal loans offer predictability and peace of mind, while HELOCs give you flexibility and access to larger sums – if you have the home equity to back it up.

Whichever you choose, make sure you understand how the product works, what it costs, and what the risks are. Borrowing money is a big decision, but with the right info, you can feel confident you’re making a smart move.

Also read:

• Should you take out a loan?
• The dos and don'ts of using a HELOC
• Guide to HELOCs