When homeowners need to borrow money, HELOCs, personal loans, and credit cards are often compared side by side. Each option offers access to funds, but the long-term cost, repayment structure, and risk profile can be very different. While HELOCs are commonly viewed as lower-cost borrowing options, that does not automatically make them the right choice for every situation. This guide compares HELOCs, personal loans, and credit cards to help homeowners understand how costs differ over time.
How Interest Rates Differ
HELOCs typically have lower interest rates than personal loans and credit cards because they are secured by your home. Credit cards usually carry the highest rates, followed by personal loans, with HELOCs sitting at the lower end of the range. However, HELOC rates are usually variable, while personal loans often have fixed rates. Credit cards may also have variable rates, but at much higher levels.
Monthly Payment Structure
HELOC payments are often interest-only during the borrowing phase, which can keep monthly payments lower in the short term. Personal loans have fixed monthly payments that include both interest and principal. Credit cards require minimum payments that are often small relative to the balance, which can extend repayment for many years if only minimums are paid.
Total Interest Cost Over Time
Lower interest rates generally mean lower total interest costs, but repayment behaviour matters just as much. A HELOC balance carried for a long period can still result in significant interest costs, even at lower rates. Personal loans typically have higher rates but are repaid on a set schedule, which limits how long interest accrues. Credit cards often result in the highest total interest cost if balances are carried month to month.
Flexibility vs Structure
HELOCs offer the most flexibility, allowing borrowers to draw and repay funds repeatedly. Personal loans offer less flexibility but more structure, which can support disciplined repayment. Credit cards offer easy access but minimal structure, making it easier to carry balances long term. The right balance between flexibility and structure depends on the borrower’s financial habits.
Risk Considerations
The key risk difference is security. HELOCs are secured against your home, which increases the consequences of missed payments. Personal loans and credit cards are unsecured, which generally carry higher rates but do not place your home directly at risk. This trade-off between cost and security is an important consideration.
When a HELOC May Be Cheaper
A HELOC may be the lower-cost option when consolidating high-interest debt, funding large expenses, or managing ongoing costs over time. Lower rates can reduce interest expense, especially when balances are actively repaid. However, variable rates mean costs can increase if interest rates rise.
When a Personal Loan May Be Preferable
Personal loans may be better suited for borrowers who want predictable payments and a clear repayment timeline. Even with higher rates, the fixed structure can reduce long-term cost uncertainty and help avoid prolonged debt.
When Credit Cards Make Sense
Credit cards may be appropriate for short-term expenses that can be repaid quickly, especially if promotional rates are available. Carrying balances long term typically results in much higher total costs compared to HELOCs or personal loans.
Behaviour Matters More Than the Product
The cheapest option on paper can become the most expensive if repayment discipline is lacking. Long-term balances, repeated borrowing, and reliance on minimum payments can drive up costs regardless of the product chosen.
Final Thoughts
HELOCs are often cheaper than personal loans and credit cards from an interest rate perspective, but lower rates do not automatically mean lower total cost. Repayment habits, interest rate changes, and risk tolerance all influence which option is most suitable.
Note: Rates and costs vary based on your credit profile, available equity, and location.