Which is Better: Equity Line of Credit or Personal Loan?

At Financial Canadian, we often get asked about the best borrowing options for different financial needs. Two popular choices that frequently come up are equity lines of credit and personal loans.

In this post, we’ll compare equity lines of credit vs personal loans, examining their key features, benefits, and potential drawbacks. By the end, you’ll have a clearer understanding of which option might be better suited for your specific financial situation.

What is an Equity Line of Credit?

Definition and Functionality

An equity line of credit, commonly known as a HELOC (Home Equity Line of Credit), allows homeowners to borrow against their home’s equity. This flexible borrowing option functions similarly to a credit card but uses your home as collateral.

How HELOCs Operate

With a HELOC, you receive approval for a maximum credit limit based on your home’s value and your outstanding mortgage balance. You can borrow up to this limit, repay, and borrow again as needed. This revolving credit feature provides significant flexibility for borrowers.

Key Features and Advantages

HELOCs offer several benefits:

1. Flexibility: You only pay interest on the amount you borrow, not the entire credit limit.
2. Lower interest rates: Rates typically fall below those of credit cards or unsecured personal loans due to the home collateral.
3. Potential tax benefits: The interest on your mortgage is 100% tax-deductible in Canada, provided the property is used for investment income purposes.

Typical Terms and Rates

As of June 2025, HELOC rates in Canada typically range from prime + 0.5% to prime + 1%. With the current prime rate at 5.45%, HELOC rates hover around 5.95% to 6.45%. These variable rates fluctuate with changes in the prime rate.

Most HELOCs feature a draw period of 5 to 10 years. During this time, you can borrow and repay as needed. After the draw period, some lenders require principal repayment, while others may offer draw period renewal.

Eligibility Requirements

To qualify for a HELOC, you typically need:

1. A good credit score (usually 650+)
2. A debt-to-income ratio below 43%
3. At least 20% equity in your home

Some lenders impose stricter requirements. For example, TD Bank requires a minimum of 35% equity for their HELOC product.

While HELOCs offer powerful financial leverage, they also carry risks. Your home serves as collateral, and variable interest rates mean your payments could increase if rates rise. Careful consideration and consultation with a financial advisor can help you make an informed decision.

Now that we’ve explored equity lines of credit, let’s turn our attention to personal loans and how they compare as a borrowing option.

Personal Loans Explained

What Are Personal Loans?

Personal loans provide Canadians with a versatile financing option for various purposes. Unlike Home Equity Lines of Credit (HELOCs), personal loans don’t require home ownership, making them accessible to a broader range of borrowers.

Types of Personal Loans

Personal loans come in two main varieties:

1. Secured Loans: These loans require collateral (such as a car or savings account) and often offer lower interest rates.
2. Unsecured Loans: More common and don’t require collateral, but may have higher interest rates due to increased lender risk.

Interest Rates and Terms

The Bank of Canada provides information on interest rates for new and existing loans booked in Canada, in Canadian dollars only. This data helps to understand the range of interest rates charged in the Canadian lending market.

Repayment terms for personal loans usually range from 6 months to 7 years. Shorter terms often come with lower interest rates but higher monthly payments. Longer terms spread out the payments but may result in more interest paid over time.

Qualification Criteria

Lenders evaluate several factors when reviewing personal loan applications:

1. Credit Score: Most lenders prefer scores of 650 or higher, though some work with lower scores.
2. Income: Stable employment and sufficient income to cover loan payments are essential.
3. Debt-to-Income Ratio: Lenders typically look for a ratio below 43%.

Online lenders often have more flexible criteria than traditional banks. For example, Mogo, a popular online lender, offers personal loans for Canadians with a no-obligation line of credit pre-approval in 3 minutes, without hurting your credit score.

As we move forward, let’s compare equity lines of credit and personal loans to help you determine which option might better suit your financial situation.

HELOC vs Personal Loan: A Comprehensive Comparison

Interest Rates and Costs

HELOCs offer lower interest rates compared to personal loans. The Bank of Canada provides data on Home Equity Lines of Credit (HELOCs) and related products secured by residential properties in Canada. Personal loan rates vary widely, starting around 7% for excellent credit borrowers and reaching up to 30% or more for those with poor credit.

HELOCs include additional costs such as appraisal fees, title search fees, and potentially higher closing costs. Personal loans usually have fewer upfront costs but may include origination fees.

Borrowing Flexibility

HELOCs provide more flexibility. You can borrow up to your credit limit, repay, and borrow again as needed. This revolving credit feature suits ongoing expenses or projects with uncertain costs.

Personal loans provide a lump sum upfront. Once you borrow the money, you can’t access more without applying for a new loan. This makes personal loans better for one-time expenses with known costs.

Collateral and Risk

A key difference lies in collateral requirements. HELOCs use your home as collateral, which puts your property at risk if you default on payments. Personal loans (especially unsecured ones) don’t require collateral, reducing your personal risk.

This increased risk for lenders with personal loans often results in higher interest rates and stricter approval criteria.

Credit Score Impact

Both HELOCs and personal loans affect your credit score differently. HELOCs, as revolving credit, can significantly impact your credit utilization ratio (which accounts for 30% of your FICO score).

Personal loans, as installment credit, don’t affect your credit utilization ratio the same way. However, they impact your credit mix (which makes up 10% of your FICO score).

Approval Process and Timeline

The approval process for HELOCs takes longer and involves more complexity than personal loans. HELOCs require property appraisal and title searches, which can extend the process to several weeks.

Personal loans often have a quicker approval process. Some lenders offer pre-approval in minutes. Full approval and fund disbursement can occur within a few business days.

Your specific financial situation, borrowing needs, and risk tolerance should guide your choice between a HELOC and a personal loan. HELOCs offer lower rates and more flexibility, while personal loans provide quicker access to funds and don’t put your home at risk.

Final Thoughts

Equity lines of credit and personal loans serve different financial needs. HELOCs offer lower interest rates and flexible borrowing, ideal for ongoing expenses or projects with uncertain costs. Personal loans provide quick access to funds without risking your home, suitable for one-time expenses or non-homeowners.

Your financial situation determines the best option for you. Credit score, income stability, home equity, and loan purpose all influence this decision. Your comfort with variable interest rates and long-term financial goals also play a role in choosing between an equity line of credit vs personal loan.

We recommend consulting a financial advisor before making your choice. For businesses looking to establish a strong online presence, our web design services at Financial Canadian can help create visually appealing and functional websites to connect with your audience effectively.