Personal Loan vs. HELOC: Lower Rate, Higher Stakes

The two tools side by side

A HELOC works like a credit card backed by your house. During the draw period you borrow what you need, up to a limit, and often pay only interest. When the draw period ends you enter a repayment period, which the CFPB says often runs ten or 15 years. A personal loan pays out one lump sum and is repaid in equal monthly payments over a set term, usually two to five years.

The personal loan average comes from the Federal Reserve's G.19 release of November 6, 2026, and covers 24-month loans at banks. Longer loans usually carry a higher rate, and online lenders often quote more to a wider range of borrowers; see average personal loan rates.

A worked example: a $25,000 home project

Say a kitchen project costs $25,000 and you want it paid off in five years. Compare a HELOC at prime plus one point, 8.00% today and variable, with a 60-month personal loan at 11.90% and no fee. We use the 24-month bank average for the loan because the Fed survey does not report a 60-month figure, so a real 60-month offer may be higher. Both are repaid in equal payments over 60 months.

At today's prime rate the HELOC saves about $2,880 in interest and about $48 a month. Closing costs come out of that saving, so a line with $1,000 in costs still leaves you well ahead. A one-point rise in prime lifts the payment by about $12 a month and the interest by about $720 over five years. If your plan lets you pay interest only during the draw period, the payment is $166.67 a month at 8.00% and $187.50 at 9.00%, but none of it reduces what you owe.

What the house adds to the deal

Because the line is secured by your home, the lender can foreclose if you stop paying. The CFPB's HELOC booklet also warns that some plans end with a balloon payment, and that if you cannot pay it in full you could lose your home. With a personal loan, missed payments damage your credit and can lead to collection and a lawsuit, but your house is not the collateral.

• Costs. The CFPB lists possible charges such as an appraisal fee, an application fee that may not be refunded, and closing costs like attorney, title and insurance fees. Some lenders waive them; ask whether any waived cost comes back if you close the line early.
• Payment changes. On a variable-rate plan your monthly payment can change even if you do not borrow more.
• A three-business-day wait. Under Regulation Z, 12 CFR 1026.15, you can cancel a credit line secured by your principal dwelling until midnight of the third business day after the account opens, you receive the rescission notice, or you receive the material disclosures, whichever is last. The lender may not release the money until that period ends.

For context only: Freddie Mac's survey put the average 30-year fixed mortgage rate at 7.18% for the week of November 5, 2026. That is a rate for first mortgages, not for HELOCs, and it tells you little about the margin a HELOC lender will add to prime.

The tax deduction, as the law now stands

A HELOC is sometimes sold on its tax deduction. IRS Publication 936, for 2025 returns, says that no matter when the debt was taken out, you can no longer deduct interest on a loan secured by your home to the extent the money was not used to buy, build or substantially improve that home. The deduction also counts only if you itemize, and acquisition debt is capped at $750,000 ($375,000 if married filing separately).

This rule began as a temporary suspension under the prior tax law. The tax law enacted on July 4, 2025 (P.L. 119-21) made the suspension and the $750,000 limit permanent, according to IRS guidance on the new law. So a HELOC used for a kitchen remodel may produce deductible interest; one used to pay off cards or buy a car does not. Your tax preparer can tell you whether the project counts as a substantial improvement.

When the HELOC is the better tool

• The project is large and the home has equity. On $25,000 or more, a rate several points lower adds up to thousands of dollars.
• The money goes into the home. Interest may be deductible if you itemize, which a personal loan's interest is not.
• You need money in stages. A renovation paid over months fits a line you draw on as invoices arrive, and you pay interest only on what you have drawn.
• Your income is steady and your budget has room for a payment that could rise with prime.

When the personal loan wins

• The amount is modest. On a few thousand dollars, closing costs and weeks of paperwork can eat most of the rate advantage.
• You want a payment that never changes. A fixed-rate loan ignores the Fed; a HELOC does not.
• You do not want to put the house at risk, especially for spending that is not on the house.
• You need the money soon. Appraisal, title work and the rescission period take time.
• You have little equity, or a line would push your total debt on the home above what you are comfortable owing. A personal line of credit is another unsecured option for costs that come in stages.

How to decide in five steps

1. 1 Price both on the same day. Get the HELOC margin, its index, any rate cap and floor, and every fee; get the personal loan APR and any fee.
2. 2 Compare total cost over the same term, adding HELOC closing costs to its interest.
3. 3 Stress-test the HELOC. Rerun the payment with prime one and two points higher. If that payment would strain your budget, the lower rate is not worth the risk.
4. 4 Check the end of the draw period. Find out what the payment becomes when repayment starts, and whether a balloon payment is due.
5. 5 Think about where else the money could come from. If you are weighing your retirement account too, read personal loan vs. 401(k) loan.

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