|
HELOC vs. Other Loans |
 |
 |
While there are many ways to raise capital now, in the future and on
demand, for many people the consideration will boil down to a straight
choice of Home Equity Lines of Credit (HELOC) or a more traditional loan.
So what are the benefits of both HELCOs and Loans and what are their
drawbacks?
Term Of Loan
While in principle the term of any credit agreements, whether a HELOC
and a Loan can be any length, an HELOC is traditional longer term than a
loan often due to the size of the credit arrangement (HELOCs tend to
be larger in size because of the need for assets to support the funds
borrowed). However, as an HELOC is basically an option to borrow an
agreed maximum figure over a maximum timescale, in reality an HELOC can be
as long or as short as the borrower wants (within the guidelines
agreed).
Interest Rate
This is where we start to see the difference between HELOCs and Loans
in that a loan is normally fixed at a specific rate for the full term.
However, an HELOC is nearly always variable and linked to some kind of
interest rate tracker, whether this is US base rates or something else
based on this figure. With a loan you are dealing with a fixed rate
and you can plan your payments as such, but with an HELOC you need to
monitor changes and ensure you are able to cover the changing interest
rate payments.
Collateral
Again this is where both HELOCs and Loans differ dramatically in that
most loans do not require any collateral (unless they are of a large
size or the borrower has a sub-standard credit rating). On the other hand
a HELOC is by its very definition a loan against your home, meaning
that if you do not keep up with your payments or you are not able to pay
off the final amount your home may be at risk.
Tax Situation
This is perhaps one of the reasons why HELOCs have become so popular of
late – the fact that in some US States the interest paid may be
deductible under income tax laws, meaning that it is possible to offset some
of the interest charge against your income tax. The situation is not
the same under loans, unless the borrower is a corporate body, where the
interest charged on personal loans is not normally tax deductible.
Flexibility
Again, this is perhaps one of the main differences between a HELOC and
a Loan, the very fact that upon signing your loan agreement you will
receive the full amount agreed. If you decide that you do not need the
full amount, or are able to pay back the loan before the end of the term
there may still be penalty charges. However, with a HELOC this is an
option to borrow up to a maximum amount over a maximum time span. You
are not obliged to use the full capacity of the loan and you will only
be charged interest on the amount of funding that you use.
Conclusion
Whether you go down the HELOC or the Loan route very much depends on
what you need the funds for, how much you need or may need to borrow, and
the timescale. Your personal credit rating may also dictate which
routes are open to you, with some lenders requiring firm collateral for
those with sub-standard credit ratings.
However, perhaps the biggest possible risk is with the HELOC if you are
not able to maintain your payments and fall behind. In this case your
home may be at risk so therefore it is strongly advisable that you
consider all options before deciding which route is best for your
situation.
|
|
|
