HELOC vs Personal Loan: Which Costs Less?

A HELOC vs personal loan comparison usually comes down to cost: a home equity line of credit typically charges a lower interest rate because it is secured by your home, while an unsecured personal loan usually carries a higher rate but gives you fixed payments and no risk to your property. On pure interest cost, the HELOC often costs less — but the personal loan can cost less in total if you need certainty and a firm payoff date.

How a HELOC and a Personal Loan Differ

A HELOC is a revolving credit line secured by your home equity. It works like a credit card with a limit, but the limit is tied to the value of your property. You can borrow, repay, and borrow again. A personal loan is an unsecured installment loan: you receive a lump sum and repay it on a fixed schedule. Because the HELOC is secured, lenders can offer lower rates. Because the personal loan is unsecured, the lender takes on more risk and usually charges more. For a deeper look at how the secured product works, see how a HELOC works in Canada.

Interest Rates: What You Actually Pay

HELOC rates are variable. They are usually quoted as prime rate plus or minus a spread. The prime rate moves when the Bank of Canada changes its policy rate, so your HELOC payment can rise or fall over time. See Canada's prime rate for how that link works. Personal loan rates are typically fixed. The lender sets a rate based on your credit score, income, and the loan term. That rate does not change during the loan. On average, personal loan rates are higher than HELOC rates — but the personal loan gives you a locked-in cost. Never assume a HELOC will stay cheap; check the current spread and ask what your payment would be if prime rises.

Fees and Setup Costs

HELOC costs can include an appraisal, title search, legal fees, and an annual or renewal fee. Some lenders waive these, so ask for a full list. Closing a HELOC may trigger a discharge fee. Personal loans often have no setup fee, but some lenders charge an origination fee that is deducted from the amount you receive. Compare the total cost of borrowing, not just the rate. The FCAC recommends asking for the annual percentage rate (APR) or cost of credit so you can compare apples to apples. If you plan to consolidate other debts, read using home equity to consolidate debt before you decide.

Qualification: Stress Test, Equity, and Credit

To get a HELOC, you typically need at least 20% equity in your home, though some lenders allow less. Federally regulated lenders also apply OSFI Guideline B-20. For HELOCs, they must qualify you at the higher of your contract rate plus two percentage points or the published qualifying-rate floor. Confirm the current floor with OSFI or your lender. Your GDS and TDS ratios also matter: lenders compare your housing costs and total debt to your income. A personal loan does not require home equity and is not subject to the federal mortgage stress test, but lenders still check your credit and debt-to-income ratio. A weak credit score may lead to a higher personal loan rate or a denial. See the federal mortgage stress test for the full picture.

Flexibility and Repayment

HELOCs usually let you pay interest-only, which keeps payments low but stretches out your debt. You can also repay principal and reuse the limit. That flexibility is useful, but it can hide the true cost. Personal loans force you to repay principal with every payment, so you see a clear end date. If you want to model a HELOC payment, try the HELOC payment calculator. Neither product is automatically cheaper: a HELOC with a long interest-only period can cost more than a fixed personal loan paid off quickly.

When a HELOC Costs Less — and When a Personal Loan Wins

Choose a HELOC when you have enough equity, you can handle a variable rate, and you want a lower ongoing interest cost. Choose a personal loan when you need a fixed payment, you are borrowing a smaller amount for a short term, or you do not want to put your home on the line. Here is a side-by-side view.

Risks to Weigh Before You Choose

The biggest difference is what happens if you cannot pay. A HELOC is secured by your home. If you default, the lender can take legal steps that may lead to the loss of your property. A personal loan is unsecured, so default damages your credit and can lead to collections, but it does not directly put your home at risk. On the other hand, a HELOC may offer tax deductibility if you use the money to earn income from a business or investments. That is a general statement only — tax rules are complex, so confirm your situation with the CRA or a tax professional. Also consider that a HELOC reduces the equity you can access later for a refinance or a second mortgage or private lending. Finally, if you already have a mortgage, adding a HELOC increases your total debt load and can affect your ability to qualify for new credit.

How to Compare Your Options

Start by asking each lender for the total cost of borrowing over the time you plan to keep the debt. For a HELOC, ask for the current rate, the spread over prime, all fees, and the repayment terms. For a personal loan, ask for the fixed rate, the term, any origination fee, and whether there are penalties for early repayment. Run both scenarios with a calculator. If you need a fixed payment and you can repay the loan within a few years, a personal loan may cost less in total even with a higher rate. If you need ongoing access to funds and you have solid equity, a HELOC may be cheaper. Either way, never borrow more than you can comfortably repay, and confirm all current rules and rates with your lender or a licensed professional.