Home Equity Line Of Credit Vs. Line Of Credit

*This post was created in collaboration with Alpine Credits

A Home Equity Line of Credit (HELOC) and a personal line of credit are both financial products that offer flexible borrowing options. Rather than taking out a lump sum of money and repaying it in fixed installments, like a regular loan, these revolving types of credit allow you to withdraw money up to your credit limit. However, as similar as they may sound, a HELOC and personal line of credit differ in terms of their security and loan requirements.

What Is A Personal Line Of Credit?

A personal line of credit is a flexible loan product that lets you borrow money up to a certain limit, repay it, and then borrow again as needed. It works similarly to a credit card but typically comes with lower interest rates.

Key features of a personal credit line are as follows:

• Loan Amounts. The amount you can borrow (or your credit limit) is based on your credit score, income, and other financial factors.
• Interest Rates. Personal lines of credit usually come with variable rates.
• Fund Access. You can borrow money whenever you need the extra funds, up to your credit limit.
• Repayments. You can pay back what you’ve borrowed at any point, however, you must make the minimum payments (interest on the amount withdrawn) each month.

Learn more: How Does a Line of Credit Work?

Pros And Cons Of A Personal Line Of Credit

Consider the following advantages and disadvantages of a personal line of credit before applying: 

Pros

• Unsecured. You won’t have to put up a valuable asset to back the loan, like a house or a car, which means it won’t be at risk.
• Lower Interest Rate Than A Personal Loan. Interest rates are often lower than unsecured personal loans. Plus, interest is only charged on the amount you withdraw, not the entire credit line.
• No Setup Fees. Fees are not typically charged to set up unsecured personal lines of credit.

Cons

• Variable Rate. Your interest rate can change at any time based on market conditions, which can increase your repayment costs.
• Financial Discipline Needed. You’ll need to practice sound financial habits to ensure that you don’t borrow more than you need and increase your debt.

What Is A Home Equity Line Of Credit (HELOC)?

A HELOC is a secured loan that is only available to homeowners who have equity in their homes. A HELOC works much like a line of credit where you can withdraw up to the credit limit whenever the need for extra cash arises. However, a HELOC is secured against your home. 

Key features of a HELOC are as follows

• Loan Amounts: You can borrow up to 65% of your home’s value.
• Interest Rates: Rates on HELOCs are generally variable.
• Fund Access: You can draw from your HELOC on an as-needed basis during the draw period, making this a very flexible financing option.
• Repayments: During the draw period (which lasts roughly 10 years), only interest payments are required. Once you enter the repayment phase (which can be as long as 20 years), you’ll need to repay your outstanding balance and interest in fixed installments.

Learn more: Understanding Mortgage HELOC Rules

Pros And Cons Of HELOCs

There are perks and drawbacks to HELOCs that should be considered before you apply.

Pros

• Interest-Only Payments. During the draw period, you’re only required to make interest payments.
• Low Interest. HELOCs often have lower interest rates compared to a line of credit as it is secured by your home
• Long Draw And Repayment Terms. The length of the draw and repayment periods can vary, but draw periods are often around 10 years, and repayment periods can be as long as 20 years. This gives you plenty of time to access extra funds and repay what you’ve borrowed.

Cons

• Your Home Is At Risk. A HELOC is collateralized by your home. If you default on your HELOC, you risk having your home repossessed by the lender.
• Mortgage Stress Test Required. You may be required to pass the mortgage stress test to qualify for a HELOC. This test shows whether you’d be able to afford payments at a higher rate than the rate in your loan contract.
• Closing Fees. Like a regular mortgage, you’ll have to pay closing costs when you take out a HELOC. These fees typically range from 1.5% to 4% of the cost of your loan.

Home Equity Line Of Credit Vs Line Of Credit Overview

Where Can You Get A HELOC And Line Of Credit?

You can get a HELOC or line of credit from a variety of financial institutions.

HELOCs

HELOCs are available from the following:

• Banks. Large financial institutions like TD Bank, RBC, BMO, Scotiabank, and CIBC offer both HELOCs and lines of credit. However, they typically have strict loan criteria, so you’ll likely need to have good credit and a low debt-to-income ratio to qualify.
• Credit Unions. Many credit unions offer HELOCs and lines of credit to their members with lower rates and fees compared to big banks. While membership is often required, their customer-centred approach can be beneficial to borrowers.
• Private Lenders. Several online private lenders, such as Alpine Credits, are available to provide HELOCs and lines of credit. These firms may be easier to secure a credit line with, as their loan criteria are less stringent compared to banks. You may be able to qualify based on your home equity alone, though you may pay more in interest if you apply with poor credit.

Lines Of Credit

Like a HELOC, a personal line of credit is also available from the same sources including banks, credit unions and private lenders. Similarly, requirements will vary depending on the lender you apply with. While banks and credit unions generally have tougher requirements, private lenders have more flexibility. However, it often comes at a higher cost.

What Credit Score Do You Need To Get A Line Of Credit Vs. A HELOC?

The credit score requirements for a HELOC and line of credit can vary depending on the lender and the specific loan product. 

Credit Score Needed For A HELOC

The minimum credit score needed for a HELOC varies by lender. Generally, banks may require good credit scores which start around 660+. That said, you may be able to get away with a lower credit score to secure a HELOC because your home collateralizes the loan. Given the high value of your home, the lender can reduce their risk.

Some lenders, like Alpine Credits, don’t look at your credit score at all, and base their approval on your available equity. This makes Alpine Credits a great option for bad credit borrowers.

Credit Score Needed For A Personal Line Of Credit

The credit score you’ll need to get a personal line of credit can vary depending on whether it’s secured or unsecured:

• Unsecured Credit Line: Since there is no asset backing the loan, the lender assumes more risk. As such, you may be required to have a good credit score of at least 660 to qualify, though a higher score can increase your chances of loan approval at lower rates.

• Secured Credit Line: Depending on the lender and your collateral, you may be able to get a line of credit with any credit score. However, a higher credit score will generally help you qualify for lower rates.

Additional Reading

Should You Use Home Equity As An Emergency Fund?

Personal Loan vs. Line of Credit

How to Get The Best Rate for a Line of Credit in Canada

Bottom Line

Both HELOCs and personal lines of credit are great financing options if you’re looking for flexibility in terms of how you access and repay your borrowed funds. HELOCs are more suitable for big expenses like home renovations or debt consolidation, particularly if you have a lot of home equity. On the other hand, personal lines of credit are better for smaller, short-term needs or for those who are not homeowners and don’t have much equity.

Home Equity Line of Credit vs Line of Credit FAQs