On this page 7 sections
In short
- HELOC or home equity loan: often lower cost for larger amounts, but secured by your home.
- Personal loan: unsecured with a set payment; cost depends heavily on your credit.
- 401(k) loan: usually no credit check, but limited, and it can come due if you leave your job.
- Balance transfer: low cost during a promotional period, then the regular rate applies.
Side by side
| HELOC | Home equity loan | Personal loan | 401(k) loan | Balance transfer | |
|---|---|---|---|---|---|
| What's at risk | Your home | Your home | Your credit | Retirement savings and taxes | Your credit |
| How much | Based on equity, income and credit | Based on equity, income and credit | Based on income and credit | Capped by IRS rules and your plan | Your card limit |
| Rate | Usually variable | Usually fixed | Usually fixed | Set by the plan | Promotional, then regular |
| Credit check | Yes | Yes | Yes | Usually no | Yes |
| Biggest catch | Rate can rise; line can be frozen in some cases | Closing costs; all at once | Cost depends on credit; origination fees | Can come due if you leave your job | Transfer fee; promotional rate ends |
How to choose
| If... | Look first at |
|---|---|
| You'll repay within the promotional period | A balance transfer |
| You need a smaller amount and will repay in a few years | A personal loan, which keeps your home out of it |
| You need a larger amount and will repay over several years, with equity and steady income | A HELOC or home equity loan |
| You want a set payment that ends on a date | A home equity loan or personal loan |
| A job change is possible soon | Be careful with a 401(k) loan |
When equity isn't the answer
Equity makes a HELOC possible, not wise. If the underlying problem is income that doesn't cover expenses, any loan, secured or not, only delays it, and putting your home behind the debt raises the stakes. See using a HELOC to pay off credit cards.
The 401(k) loan rules
Under IRS rules, a plan can lend you the lesser of $50,000 or the greater of $10,000 or half your vested balance. The $50,000 is reduced if you've had another plan loan in the past year. Not every plan allows loans, and plans can set lower limits. You generally repay within five years, longer if the loan buys your principal residence. The risks:
- Missed payments. A loan that isn't repaid on schedule is treated as a taxable distribution of the outstanding balance, including any early distribution tax.
- Leaving your job. Depending on the plan, you may be able to keep repaying, or the plan may offset the unpaid balance against your account. If it's offset because you left, you generally have until your tax return's due date, including extensions, to put an equal amount from other money into an IRA or plan and avoid tax on it.
- Missed growth. Money you borrow isn't invested while it's out.
Balance transfers
Card issuers must disclose any balance transfer fee, which is usually added to the balance when you transfer. A qualifying promotional rate generally must last at least six months, and the issuer must tell you in advance what rate applies after it ends.
Frequently asked questions
Is a HELOC cheaper than a personal loan?
Often, because your home secures it. That's also the risk. For smaller amounts you'll repay quickly, a personal loan keeps your home out of it.
How much can I borrow from my 401(k)?
Under IRS rules, the lesser of $50,000 or the greater of $10,000 or half your vested balance, reduced if you've had another plan loan in the past year, and only if your plan allows loans.
What happens to a 401(k) loan if I leave my job?
It depends on the plan. If the plan offsets the loan because you left, you generally have until your tax return's due date, including extensions, to roll over an equal amount and avoid tax on it.
Should I use a HELOC or a home equity loan?
A HELOC fits uneven or ongoing needs. A home equity loan fits a one-time amount you want to repay on a set schedule.
How long do balance transfer promotional rates last?
A qualifying promotional rate generally lasts at least six months under federal rules, and the issuer must disclose the rate that follows.
Questions about your own situation? Contact a licensed loan officer. It's optional, and your information is not sold to lead marketplaces.