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How to pay for a large expense: personal loan vs. HELOC vs. credit card

man on ladder painting sunroom
June 07, 2018

By Pam Leibfried

When your family runs into an expense that’s bigger than your emergency fund, there are several options available to get the funds to cover the expense. If you don’t have a family member who can help you out of the bind (i.e., the Bank of Mom & Dad is closed!), an option is to take out a loan from a bank or credit union.

But should you charge the expense on a credit card, pay with a home equity line of credit (HELOC) or apply for an unsecured personal loan? Below, we discuss some of the questions you need to ask yourself to figure out which of these three loans is the right option to meet your financial needs.

How much money do you need?

If your unexpected expense is a new appliance or car repair that you’ll be able to pay off in a few months, either a personal loan or a credit card charge would be a good choice. On the other hand, it likely isn’t worth it to go through the approval process for a HELOC to pay for a one-time expense that is so short-term.

But if your big expense is a major repair to your home or a new roof or HVAC system and you know it will take you several years to pay back the entire amount, a HELOC could be a better option, especially if you have built up substantial equity in your home.

How quickly do you need the money?

Personal loans

Personal loans generally have a quick approval process, as there is no need to confirm the value of collateral (unlike a HELOC, which includes an evaluation of your home’s value and your equity in it). A personal loan hinges on your overall creditworthiness, and credit checks generally take minutes, not days.

That’s why an Alliant Personal Loan is generally processed same-day. So if you apply for the loan in the morning and your application is approved, we can usually deposit the funds into your Alliant checking or savings account the very same day. Personal loans aren’t always completed same-day, however; turnaround time can depend on what time the application is received and whether there are delays due to credit freezes or incorrect information supplied on an application.
Pro tip: If you’re thinking of taking out a personal loan from a lender other than Alliant, be sure to ask if the lender charges origination fees. Alliant doesn’t charge this fee, but many lenders charge origination fees from one to five percent on personal loans, reducing the loan proceeds; for example, a three percent origination fee on a $10,000 personal loan nets you only $9,700.

HELOCs

The time it takes to get your money with a HELOC depends on whether you’re accessing funds from an existing HELOC or applying for a new HELOC.

  • Existing HELOC. Getting funds from an existing HELOC is a quick and easy process. You just write a check or transfer money from your HELOC account.
  • New HELOC. If you don’t already have the line of credit set up, a HELOC likely isn’t a viable option if you need the money immediately. The HELOC application and approval process takes a while – at least a week, generally. But if you don’t need the money immediately, a new HELOC, with its lower interest rate, could be a great option.

Credit cards

Like with HELOCs, the time it takes to access the line of credit from a credit card depends on whether you already have the card or are looking to apply for a new credit card.

  • Existing credit card. If you have a card already and it has a credit limit high enough to allow you to cover the expense, you can just charge it with no additional steps needed.
    Pro tip: If the expense represents a large portion of your available credit limit on that card, it can have a negative impact on the part of your credit score that looks at your cards’ credit utilization ratio. But you can contact your credit card issuer and ask for a credit line increase to lower your utilization. A hard pull may be required and the timing of the approval may vary from instant to a few days.
  • New credit card. If you’re applying for a new credit card, the application review and (hopefully) approval process is generally pretty fast, but you’ll still have to wait for your new card to arrive in the mail, which can take a week or so.

How good is your credit?

Unsecured loans. Approvals for unsecured loans – like a personal loan or a credit card – hinge mostly on your credit score. If your credit is good, the approval process for an unsecured loan should be a breeze. But if you have bad credit or an already-high debt-to-income ratio, it could be more difficult for you to get an unsecured loan or line of credit. If you’re approved for the loan or credit card, it may be for a lower amount than you need to cover the expense or you may have to pay a higher-than-average interest rate on the loan.

Secured loans. A secured loan like a HELOC, though, may have different credit score requirements because you’re offering the lender collateral in your home. With bad credit, you’ll likely need a lower debt-to-income ratio and a more substantial percentage of equity in your home compared to someone with good credit. You’ll also pay a higher rate of interest on your HELOC than someone with stellar credit would pay.

How quickly can you pay the money back?

Personal loans have shorter terms.
Personal loans generally have a set term for payback. In other words, it would have to be paid back within a specific amount of time: one year, two years, etc. For example, Alliant offers personal loans in terms ranging from one to five years. If you aren’t confident that you’ll be able to pay the loan back during the time frame offered by the personal loan you’re considering, a personal loan is not the best option.

Credit cards have flexible terms.
When you pay with a credit card, you can stretch the payments out for as long you need to provided that you keep making your minimum payments each month. That said, paying a very large credit card balance off very slowly would incur a lot of cumulative interest over time.

HELOCs give you more time to pay.
HELOCs allow you to spread out your payments over a longer period of time. Terms can vary by lender and loan. For example, Alliant offers HELOCs with terms up to 30 years. Of course, the faster you can pay the loan back, the less interest you’ll pay, so we won’t penalize you if you pay it off more quickly than scheduled.
Pro tip: If you’re considering a loan from another lender, be sure to ask if they penalize you for early payoffs, because some lenders do.


After you’ve considered these factors, if you’re still not sure which loan is the best one for you, our lending experts can help you to figure out which option best fits your needs.  Call us at 800-328-1935 to talk to a member service representative.

To learn more about available credit and loan options, check out more articles in the Credit 101 section of Money Mentor: 


Pam Leibfried is a marketing content specialist whose love of words led to a writing and editing career. After a brief stint teaching English, she transitioned to corporate communications and spent 20 years at The Nielsen Company before joining Alliant’s content development team. Early in her work life, Pam’s friend Matt explained the benefits of a 401(k) and her dad encouraged her to start a Roth IRA. Their good counsel prompted her to prioritize retirement savings, which just might enable her to retire early so she can read more and live out the slogan on her fave T-shirt:  “I have a retirement plan: I plan on quilting.”