When you need extra money for major expenses like home renovations, debt consolidation, or life events, choosing the right type of loan matters. Two common options are a Home Equity Line of Credit (HELOC) and a personal loan. Both can help you access funds, but they work very differently and suit different needs. In this guide, we’ll compare how each one works, what their pros and cons are, and how to decide which one fits your financial situation best.
What is a HELOC Loan?
A HELOC, or Home Equity Line of Credit, is a type of loan where you borrow money using your home as collateral. It is considered a revolving credit line, which means you can borrow, repay, and borrow again within a set credit limit. Since it is tied to your home’s value, it is also known as a second mortgage.
To qualify, most banks require you to have at least 15% to 20% equity in your home. The lender considers your home’s appraised value, your remaining mortgage balance, and your credit score to decide how much you can borrow. Typically, you may be allowed to borrow up to 85% of your home equity.
Example:
Suppose your home is worth ₹80 lakhs and you still owe ₹30 lakhs on your home loan. Your equity is ₹50 lakhs. Based on 85% of that, you could qualify for a HELOC of up to ₹42.5 lakhs.
What Is a Personal Loan?
A personal loan is money you borrow from a bank, credit union, or online lender that you agree to pay back in fixed monthly payments. These loans are usually unsecured, which means you do not need to offer any asset, like a house or car, as collateral.
You can use a personal loan for almost anything such as consolidating debt, paying for a wedding, covering emergency costs, or making a large purchase. The loan amount, interest rate, and repayment period are agreed upon upfront, so you know exactly how much you need to repay each month. Since the loan is based on your credit score and income, better credit usually means lower interest rates.
HELOC vs. Personal Loan: What’s the Difference?
| Feature / Aspect | HELOC (Home Equity Line of Credit) | Personal Loan |
|---|---|---|
| Collateral Requirement | You must use your home as security. The loan amount is based on how much equity you have in your property. | No collateral is needed. Approval is based mainly on income, credit score, and repayment capacity. |
| Type of Funding | Works like a revolving credit line. You can borrow, repay, and borrow again within your approved limit during the draw period. | You receive the full loan amount in one lump sum. Once disbursed, you cannot reuse the amount after repayment. |
| Interest Rate Structure | Interest rates are usually variable and tend to be lower because the loan is backed by property. | Interest rates are usually fixed and sometimes higher compared to HELOC since there is no asset backing the loan. |
| Repayment Period | Comes with two phases. The first phase allows withdrawals and interest-only payments. The second phase focuses on full repayment, often spread over many years. | Repayment is done through fixed monthly instalments, usually over a shorter period. |
| Overall Loan Duration | Long-term borrowing option. The total repayment period can extend up to twenty years or more depending on the lender. | Short to medium-term option. Most personal loans are repaid within one to seven years. |
| Risk Level | Higher risk because your home is involved. If you fail to repay, the lender may take legal action against the property. | Lower asset risk since no property is pledged. However, missed payments can damage your credit score. |
| Speed of Approval and Disbursal | Takes more time because property valuation and legal checks are required. Approval may take a few weeks. | Faster process. Many lenders approve and disburse funds within a few working days. |
| Usage Flexibility | Suitable for long-term expenses like home renovation, large repairs, or education costs where funds are needed in stages. | Better for immediate needs such as medical bills, travel expenses, or emergency spending. |
| Tax Benefits | Interest paid may qualify for tax deductions if the money is used for home improvement or construction, subject to tax rules. | Interest paid usually does not qualify for tax deductions. |
| Monthly Payment Pattern | Payments can vary if interest rates change. Monthly amounts may increase or decrease over time. | Monthly instalments remain mostly stable since interest rates are fixed. |
| Borrowing Discipline | Easy access to funds can lead to overspending if not managed carefully. | Fixed amount and fixed repayment schedule help borrowers plan expenses more clearly. |
Why a Freo Personal Loan Is a Smarter Choice Than a HELOC
Here’s why many borrowers today prefer a Freo Personal Loan over a Home Equity Line of Credit (HELOC):
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No Collateral Required
Unlike HELOCs, which are secured by your home, Freo Personal Loans do not need any collateral. That means your property stays safe, and you can still get access to the funds you need.
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Faster and Simpler Approval
Freo’s loan process is fully digital and far more straightforward. You can apply online, upload your documents, and get approved within hours. A HELOC usually involves a property appraisal, more paperwork, and longer approval times.
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Predictable Repayments
With a Freo personal loan, you know exactly how much you need to pay every month. The interest rate and EMIs are fixed from the start, helping you plan your budget better. A HELOC often has variable interest rates, which means your payments can increase unexpectedly.
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Flexible Usage
There are no restrictions on how you use the funds. Whether it's for education, travel, emergencies, or debt consolidation, Freo gives you the freedom to spend as needed.
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Lower Upfront Costs
Most personal loans, including Freo’s, come with minimal processing charges and no appraisal fees. On the other hand, HELOCs can include closing costs, property valuation charges, and other hidden fees that raise your total cost.
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Ideal for Non-Homeowners
If you do not own a home, a HELOC is simply not an option. Freo personal loans are available to both homeowners and renters. As long as you meet the income and credit criteria, you can apply and get approved.
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Fully Online Experience
When you apply a personal loan online, you don’t need to visit any branch or deal with lengthy paperwork. HELOCs typically involve face-to-face meetings and manual processing steps.
Closing Thoughts
Both HELOCs and personal loans have their place, but the right choice depends on how much risk, flexibility, and certainty you want. If you are comfortable using your home as security and need funds over a long period, a HELOC can work. But if you prefer quick access, fixed repayments, and no risk to your property, a personal loan makes more sense. For many borrowers today, especially those looking for speed and simplicity, a Freo Personal Loan offers a safer and more straightforward way to meet financial needs without added stress.
Frequently Asked Questions (FAQs)
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What is the main difference between a HELOC and a personal loan?
A HELOC is a secured line of credit backed by your home and usually has a variable interest rate. A personal loan is unsecured, comes with fixed rates, and has predictable EMIs.
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Is a HELOC cheaper than a personal loan?
HELOCs often have lower rates due to collateral, but added costs like appraisal fees and fluctuating interest can raise the total expense. Personal loans offer fixed costs, making budgeting easier.
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Which is better for short-term expenses, a HELOC or a personal loan?
A personal loan is better for short-term or urgent needs. It offers quick approvals, fixed monthly payments, and no need for collateral, making it easier to manage.
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Does a HELOC put your home at risk?
Yes. If you default on payments, the lender can take legal action and your home could be at risk. Personal loans are unsecured and don’t affect your property.
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Can I get a personal loan if I do not own a house?
Yes, you can. Personal loans don’t require home ownership. They're available to renters, first-time borrowers, and anyone without real estate assets.
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Which loan option is easier to get approved for?
Personal loans are generally easier and quicker to get. They require minimal paperwork and no property evaluation, unlike HELOCs which need home equity checks.
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Are interest rates fixed or variable for HELOCs and personal loans?
HELOCs usually come with variable rates that may change over time. Personal loans offer fixed rates, so your EMI stays the same throughout the loan.
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How do HELOCs and personal loans affect credit scores?
Both can build your credit if you repay on time. However, missing HELOC payments can have more serious consequences since your home is used as collateral.
