Personal line of credit, home equity line of credit, or personal loan: Which Is right for you?

Editor’s note: This is the ninth article in a fall financial series of New Dentist Now blog posts from Darien Rowayton Bank, which provides student loan refinancing and is endorsed by the American Dental Association. Qualifying ADA members receive a 0.25 percent rate reduction to DRB’s already low rates for the life of the loan as long as they remain ADA members. View rates, terms and conditions and disclosures at student.drbank.com/ADA.

DRBDo you need money for a home renovation, cross-country move, engagement ring, or other big life event, but want to avoid accruing credit card debt? Or maybe you’re looking for a cash infusion to pay down existing debt. You have options.

Personal and home-equity lines of credit, and personal loans, can offer access to funds at lower interest rates than most credit cards. Each of these financing options has benefits and downsides, so you’ll want to understand the differences before you apply.

Personal Lines of Credit

A line of credit is similar to a credit card in that you’re given a maximum amount of money that you can borrow against. You make payments based on how much you borrow. The main difference between a personal line of credit and a credit card is that personal lines of credit generally have lower interest rates than credit cards. That makes them much harder to get.

How to find either of these? As you probably know—just check your mailbox for advertisements and applications from credit-card companies—credit cards are not difficult to get for most people. Personal lines of credit, on the other hand, require a relatively thorough vetting process by lenders, including income verification and credit checks. If you qualify, a personal line of credit can offer access to funds at a lower rate than a credit card, and you can withdraw 100 percent of a personal line of credit in cash at no extra costs. Personal lines of credit are especially helpful if you need ongoing access to funds of unpredictable amounts.

There are some downsides: The interest rates on personal lines of credit tend to be higher than on home-equity lines of credit (see below), and personal lines of credit are not tax-deductible. However, if cash flow is what you’re after, and you don’t have equity in a home, a personal line of credit could be a good option.

Home-Equity Lines of Credit

Like a personal line of credit, a home-equity line of credit (or HELOC, pronounced HE-lock) lets you borrow money on an ongoing basis, up to a certain amount, at a variable interest rate. The difference is that with a HELOC, you are using your home as collateral, so you can only get a HELOC if you have equity in a home that you own. That doesn’t mean you have to use it for home-related expenses, however. The most common use for a HELOC is home renovations and repairs, but you can use it for whatever you want—paying off debts, college tuition, weddings, you name it.

If you qualify for a HELOC, you will generally get better interest rates than with a personal line of credit or personal loan, and the interest is tax deductible. You need to be confident in your ability to make payments on your HELOC—with your home on the line as collateral, the stakes are higher than with a personal line of credit or loan. But assuming you have a repayment plan figured out, the HELOC financing option has a great amount of upside.

Personal Loans

With personal loans, you get the whole lump-sum of money upfront. The repayment term, or length of the loan, is fixed (usually two-to-five years) and so is the interest rate. If you have a clear idea of exactly how much money you need, and you’re someone who prefers predictable monthly payments, a personal loan might be the way to go. Personal loans also typically come through faster than HELOCs, because there’s no property to get appraised.

You’ll want to look closely at interest rates when considering a personal loan. Personal loans tend to have higher interest rates than lines of credit because personal loans are usually considered unsecured loans. This means that there’s no asset that a bank can come after if you’re unable to pay back the loan. To mitigate that risk, lenders offer unsecured personal loans at higher interest rates, often into the double digits. Some lenders will make secured personal loans with lower rates, but you’ll need to put up collateral to qualify, which can be risky if you’re already running tight on funds.

What They All Have in Common

Personal and home-equity lines of credit, and personal loans, all have one thing in common—they require good credit. Of the three, HELOCs are slightly easier to qualify for because your home is used as collateral, but lenders will want to see signs of good credit for any financing option.

Before you apply for a personal or home-equity line of credit, or a personal loan, you should know where you stand with your credit report and score. You can always check your credit score for free.

 

About DRB

DRB (Darien Rowayton Bank) is a national bank, marketplace lender and the fastest lender in industry history to reach $1 billion in student loan refinancings. FDIC insured and established in 2006, DRB Student Loan has helped thousands of professionals with graduate and undergraduate degrees across the country to refinance and consolidate federal and private student loans, saving these borrowers thousands of dollars each.

 

DRB launched a personal loan for dentists this year. Borrow up to $80,000 if in practice or 12 months of exiting training with contract. Borrow up to $45,000 if still in training without contract. Click here for more information and to view rates, terms, and disclosures.

 

For more information about the company, visit https://student.drbank.com/

3 comments

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  • It’s not necessarily the case that all these options “require good credit”. Certainly, this is currently the case with home equity loans and lines of credit, but personal loans, personal lines of credit and credit cards are generally available to people at various points on the credit spectrum (as are auto loans).

    That said, for home equity products, there can be a wide variance in credit availability; some lenders won’t make these products available to those with FICO scores below 720, but others have more liberal standards — a FICO 680 or 700 may be enough to have access to this kind of financing. Lower score borrowers will likely need to scour their markets to see what might be available to them, and of course, a lower credit score may mean higher interest rates and possibly other restrictions.

  • It’s good to know that a home equity line of credit could help you to receive regular payments up to a set amount. My wife and I have recently run into a difficult financial situation. I think that we should open up a home equity line of credit until we get back on our feet.

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