Using a personal loan vs. a line of credit for debt consolidation: Which is Better?

_{By Bromwich+Smith Staff | 775 words | Reading Time: 3 minutes and 46 Seconds | Date: 2022/04/19}

Using a home equity loan to consolidate credit card debt can be an extremely helpful option. With the right credit score, you can qualify for a loan at a low interest rate. This allows you to pay back what you owe in a more efficient way. It minimizes the total cost of debt elimination and often means that you pay less each month, too.

However, although loans can be useful for consolidating debt not all loans are equal. 

Home Equity Line of Credit vs Personal Loan

What is a Home Equity Line of Credit?

A home equity line or home equity line of credit (HELOC) is a secured form of borrowing. Your home is your collateral.  HELOCs are revolving in nature which means you can borrow money as needed and you only pay interest on the money that you borrow. While at the same time, as you borrow money, you can pay it back and then borrow again as required. 

What is a personal loan?

A personal loan is a loan where you borrow a fixed amount for an agreed upon period of time. When you sign up for a personal loan, you’re agreeing to repay the full amount, plus interest and any fees. This is done by making regular loan payments, referred to as installments.

Personal loans are usually for a specific reason, such as debt consolidation, home renovations or furniture. 

You can take out a personal loan from banks and credit unions. If you don’t qualify at the banks due to a lower credit score or a lack of income, you can apply for a personal loan with an alternative or private lender (although the interest rate will be higher and there may be additional fees).

A personal loan is usually unsecured. This means that there isn’t an asset backing it. When there’s an asset such as your home backing it, it may be referred to as a home equity loan.

The difference between a home equity loan and personal loan is collateral. A personal loan is unsecured debt, meaning it is not backed up by collateral. Whereas a home equity loan is secured debt. You borrow against the value of your home. This means your home acts as collateral. 

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Why Choose a Home Equity loan?

A secure loan means you can qualify for a lower interest rate without having excellent credit.   Since your home is your collateral, this means less risk for your lender leading to better rates and terms. 

Pros and cons of personal loans

We thought we would share a summary of the pros and cons of personal loans. To help you determine which may be the right choice for you. 

Pros:

• Besides fixed regular payments, you can also expect a fixed interest rate. That means you don’t have to worry about your interest rate increasing during the term of your personal loan.
• Once the term of your personal loan is over, your debt no longer exists. 
• A personal loan may come with a lower interest than an unsecured line of credit, helping you save money.
• A personal loan may be ideal for debt consolidation. You’ll only have one monthly payment to worry about (instead of several) and you’ll benefit from a lower interest rate
• A personal loan can be a great way to build or rebuild credit. By consistently making your payments on time and in full, it illustrates you’re a responsible borrower. 

Cons:

• You must make regular monthly payments. There may be little flexibility if you run into financial difficulty unfortunately. 
• There is interest on the full amount you borrow right away, whether you need the full amount or not.
• Personal loans may be tougher to qualify for, especially if you’re a senior on a fixed income. 
• The interest rate on a personal loan is almost always higher than a home equity loan. That’s because unlike a home equity loan, there’s no asset to secure it. As such it will take you longer to pay off your debt costing you more in interest.
• If you have a small amount of debt, it may not be worth it to take out a small personal loan to pay it off.

In some circumstances, using a home equity loan to take advantage of your equity can be a smart financial move. However, you should always consult with a certified professional before you move forward. 

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Regardless, if you are feeling financial stress and don’t know where to start, we’re here to help. With Bromwich+Smith you are never alone and we ensure that our expertise will leave you feeling hopeful and confident. Call our Licensed Insolvency Trustees today for a free, no obligation, confidential consultation 1-855-884-9243. Let’s see you flourish!