When considering large planned expenses that may be difficult to perfectly time — whether embarking on a home renovation project or paying for a child’s K-12 education — flexible access to funds can be helpful, even for the most avid savers. In these cases, consumers may want to avoid using a high-interest credit card or the important cash reserves built up in their emergency savings.
For individuals seeking other options, a home equity line of credit (or HELOC) and a personal line of credit are two of the most popular credit products financial institutions offer for liquidity. Each has its benefits, but before deciding which is the better product for you, it’s important to understand how the two lines of credit work, and what the main differences are.
HELOC vs. personal line of credit: What’s the difference?
Although both a HELOC and a personal line of credit provide access to money whenever you need it during a set period of time (called the draw period, usually over a number of years), there are essential differences that make the two products distinct.
Broadly speaking, the main difference between a HELOC and a personal line of credit is whether collateral is required to secure the loan. A HELOC is a loan based on your home’s value beyond what you owe on it; by definition, it is “secured” with an asset — your home, which you’ll be required to put up as collateral.
A personal line of credit, on the other hand, is unsecured, which means that qualification depends on your income, expenses and credit history, including credit report and credit scores. Provided you meet the lender’s terms and conditions, you can draw down funds as needed for a variety of purposes against a set credit amount.
Aside from the issue of collateral, there are other differences to consider when deciding between a HELOC vs. personal line of credit. Some of the main considerations include:
Flexibility of use
Flexibility of use refers to the ways in which borrowers are able to use the money from their line of credit. As far as these products go:
- HELOC: A HELOC is an open line of credit that’s secured by your home’s value, so the amount that you’ll be able to draw upon will depend on how much equity you have in your home. In other words, the longer you’ve owned your home and the more money you’ve put towards it, the more money you’ll be able to get out of a HELOC. This credit is provided to you over a certain number of years, and you can draw on it at any point during that time. The interest and monthly payments start at the point from which you make your first withdrawal. Generally, borrowers use this money for anything from renovations on their home to buying a new home to helping fund their child’s education.
Consider your needs: During the draw or interest only (IO) period — which is usually up to 10 years for a HELOC — the borrower owes only interest on the loan. After the IO period ends, the loan must be repaid in full throughout a period of time that’s known as the repayment period. Because of these nuances, it's important to understand the scope and length of your needs when considering financial products, as well. For example, a HELOC may be better suited for a large or long-term project, where the IO period is usually up to 10 years and the repayment period can be up to 15 years.
- Personal line of credit: In general, the amount of money available from a personal line of credit isn’t directly correlated to the value of any other assets, and borrowers aren’t necessarily required to put up any collateral in order to secure the loan. Similar to a HELOC, though, borrowers can access funds up to the loan amount on their line of credit, and they only pay interest on the money they decide to borrow. When a personal line of credit has desirable terms, this can be a smart way to consolidate and possibly even lower monthly student loan payments, cover home expenses or repairs, or even finance a car. First Republic Bank’s Personal Line of Credit offers a two-year draw period, during which a borrower would only need to make payments on their interest, followed by an amortization period (or repayment period) where the borrower pays the full principal and interest.
Maximum loan amounts
How much you can actually borrow from a loan is usually an important factor to consider. That likely determines what you can do with the money from your line of credit.
- HELOC: With a HELOC, how much a borrower can take out will be dependent on how much equity they actually have in their home, since they’ll be putting their home up as collateral on the loan itself. This means that the longer a borrower has owned their home and the more payments they’ve made towards it, the more likely it is that they’ll be able to get a larger loan.
- Personal line of credit: Since this is usually an unsecured loan, financial factors like credit history, income and expenses will weigh heavily into how much a borrower is able to get from a personal line of credit. After that, maximum loan amounts for personal lines of credit are set by individual lenders. First Republic's Personal Line of Credit offers loan amounts of anywhere from $60,000 to $350,000, depending on individual factors of the borrower.
As mentioned earlier, loans that are considered “secured” require you to put up something of value in order to gain access to the loan. “Unsecured” loans, on the other hand, require no collateral to apply.
- HELOC: A Home Equity Line of Credit is dependent on just that — the borrower’s home equity. This type of secured loan requires borrowers to put up their house as collateral for the loan. This of course means that borrowers must own their house — or be in the process of making payments — in order to secure this type of funding, and how much funding they get will depend on how much equity they currently hold in the home.
- Personal line of credit: A personal line of credit is an unsecured loan, which means there are no additional collateral considerations when applying. Because this type of loan is unsecured, being in solid financial standing will make borrowers better candidates for the best rates.
How much you end up paying in interest over the life of a loan is an essential element to consider, since this can add thousands of dollars onto the overall cost of your loan. The Annual Percent Rate (or APR) on your loan refers to the interest rate that you'll pay for the whole year, including fees. Think of the APR as a number that represents the total cost of borrowing money from a lender; this allows prospective borrowers to make clear comparisons as they evaluate offerings from lenders.
- HELOC: Interest rates on a HELOC will be set individually by each financial institution. They tend to be variable, which means that the interest rate a borrower pays throughout the life of the loan can fluctuate. It is also based on a number of factors, including the Prime Rate, overall loan amounts and additional credit qualifications of the borrower.
- Personal line of credit: The interest rate for a personal line of credit will also be set by each individual lender, and these also tend to be variable rates in most cases. First Republic Bank’s Personal Line of Credit, however, is available at low fixed rates, meaning the interest rate that a borrower pays will remain constant throughout the life of the loan. Rates on a personal line of credit may also be based on characteristics like loan amount and borrower qualifications. Overall, though, personal lines of credit tend to have lower interest rates than other products — like student loan refinancing products, personal loans and credit cards — which makes them an excellent option for consolidating other debts or paying for big purchases that may exceed typical monthly expenses. At First Republic, for example, a typical personal line of credit APR typically runs anywhere from 2.25% to 3.50% with discounts.
Terms and conditions
Additional terms and conditions are essential to understand before committing to any new financial products. Not all lenders are created equal when it comes to these two financing options, so it's especially important to compare the specific offerings between different companies when picking which is best for your particular needs.
- HELOC: Individual terms and conditions for HELOCs will be set by individual lenders, although most do come with variable interest rates. For example, with a Home Equity Line of Credit from First Republic, there is no required annual review of the loan, so you can continue funding your projects without interruption. Also, there are no additional closing costs if the product is closed simultaneously with a First Republic mortgage. The first few years are also interest-only payments. Interest on a HELOC may also be tax-deductible, so borrowers should check with their tax advisor to learn more about those specific benefits.
- Personal line of credit: Again, each lender will offer its own specific terms and conditions for a personal line of credit, but in general, most personal lines of credit tend to come with variable percentage rates. First Republic’s Personal Line of Credit, however, is available at a fixed APR (meaning the interest you pay will never go up over the life of the loan), and interest rates typically range from 2.25% to 3.50% with discounts. They're also available in 7-, 10- or 15-year loan terms, with interest-only payments during the first two years. Borrowers do have the option to make payments on principal and interest in the first two years, if they wish; principal amounts repaid during the two-year draw period are available to be borrowed again. Loans are available in amounts up to $350,000. Finally, for First Republic’s Personal Line of Credit, there are no origination, maintenance and prepayment fees.
Borrowers can see if a personal line of credit is right for them and calculate potential fixed interest rates by using a personal line of credit calculator.
Is a HELOC or a personal line of credit right for you?
Determining which financial product is right for your specific needs is a highly personal decision, and weighing all of the different benefits, terms and conditions should be part of your process. If you’re uncomfortable putting up your home for collateral, you don’t have much equity in your home, or you don’t own your home at all, then a personal line of credit may be the better product for you. At First Republic Bank, the fixed interest rates on a personal line of credit also mean that you won’t have to worry about interest rates going up over time.
If you’re still not sure which product is best for you, a dedicated banker at First Republic can help walk you through the options based on your specific needs.
Personal Line of Credit consists of a two-year, interest-only, revolving draw period followed by a fully amortizing repayment period of the remainder of the term. Draws are not permitted during the repayment period. Full terms of 7, 10 and 15 years available.
This product can only be used for personal, family or household purposes. It cannot be used for the following (among other prohibitions): to refinance or pay any First Republic loans or lines of credit, to purchase securities or investment products (including margin stock), for speculative purposes, for business or commercial uses, or for the direct payment of post-secondary educational expenses.
The terms of this product may differ from terms of your current loan(s) that are being paid off, including but not limited to student loans. By repaying such loans, you may permanently be giving up tax and repayment benefits, including forbearance, deferment and forgiveness, and you may not be able to reobtain such benefits if this loan is refinanced with another lender in the future.
Annual Percentage Rate. Rates effective as of June 15, 2020 and are subject to change.
Borrower must open a First Republic ATM Rebate Checking account (“Account”). Terms and conditions apply to the Account. If the Account is closed, the rate will increase by 5.00%. Rates shown include relationship-based pricing adjustments of: 1) 2.00% for maintaining automatic payments and direct deposit with the Account, 2) 0.50% for depositing and maintaining a deposit balance of at least 10% of the approved loan amount into the Account, and 3) an additional 0.25% for depositing and maintaining a deposit balance of at least 20% of the approved loan amount into the Account.
Personal Line of Credit minimum is $60,000; maximum is the lesser of $350,000 or debt to be repaid at origination plus $100,000. Line of credit cannot be fully drawn at origination.
Contact your legal, tax and financial advisors for advice on deciding whether this is the right product for you. Terms and conditions apply.
Product is not available in all markets. For a complete list of locations, visit firstrepublic.com/locations. Applicants must meet a First Republic banker to open account. This is not a commitment to lend; all lending is subject to First Republic’s underwriting standards. Applicants should discuss line of credit terms, conditions and account details with their banker.
The strategies mentioned in this article may have tax and legal consequences; therefore, you should consult your own attorneys and/or tax advisors to understand the tax and legal consequences of any strategies mentioned in this document.
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