Line of Credit vs Term Loan: Which One Costs You Less
Compare a HELOC and a term loan: variable versus fixed rates, interest-only payments, and the computed $333-a-month cost of a $50,000 line at 8 percent.
Use This Like a Tool
The wrong option usually looks fine until timing, taxes, or execution pressure shows up.
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A lender approves you for $50,000 and you owe nothing. The approval is the product: access. A term loan sells the opposite — a lump sum, a fixed payment, and a finish date. Both can carry the same balance, and they can cost very different amounts while they carry it.
This guide compares the two structures, shows what an interest-only payment actually costs, and matches each product to the job it does well.
What each product is
A home equity line of credit, or HELOC, is a revolving line secured by your home's equity. During the draw period, usually five to ten years, you can borrow up to the limit, repay, and borrow again. The rate is variable, and most lenders offer an interest-only payment while you draw.
A term loan is the older, simpler machine. The lender pays out the full amount once, you receive a fixed rate and a fixed monthly payment, and the loan ends on a scheduled date. Personal loans and auto loans are term loans, and lenders also offer HELOC-style term loans that convert equity into a fixed payment.
The interest-only payment: feature and trap
Here is the computed example. Draw the full $50,000 on an 8% HELOC, and the interest-only payment is about $333 per month. That payment covers no principal. The balance sits at $50,000 while you pay it, and when the draw period ends, the structure converts to repayment.
| Structure | Monthly payment on $50,000 at 8% |
|---|---|
| Interest-only during draw | About $333 |
| Amortized over 10 years | About $607 |
Both rows are computed. The $333 payment feels cheap, and the $607 payment is the honest price of repaying the same balance. The difference is the principal you never touched during the draw period.
How the rates move
HELOC rates track the prime rate and can reset monthly. The payment follows the rate, so a rising rate environment lifts the cost of the balance you already drew. A term loan locks one rate at closing, and the payment does not move for the life of the loan.
That difference is the whole trade. The line of credit prices flexibility and carries rate risk. The term loan prices certainty and carries none. Neither is objectively cheaper; the answer depends on whether the rate moves against you while the balance is out.
What the fees look like
Fees separate the offers as much as rates do. HELOCs carry annual fees, appraisal and closing costs, and sometimes a fee to close the line. Term loans carry origination fees, and some carry prepayment penalties that charge you for finishing early. Ask for the fee schedule in writing and fold it into the comparison, because a line with no closing costs can beat a line with a slightly lower rate and $1,500 in fees.
The two products side by side
| Line of credit (HELOC) | Term loan | |
|---|---|---|
| Rate | Variable, resets with prime | Fixed at closing |
| Payment | Interest-only option, then resets | Same amount every month |
| Access | Reborrow during the draw period | One disbursement |
| Collateral | Home equity | Varies; personal loans are usually unsecured |
| Best use | Staged projects, rolling costs | One-time purchase, set total |
| Main risk | Rate resets, line can be frozen | Fees and prepayment cost if plans change |
The collateral row deserves attention. A HELOC puts the home behind the debt, and a frozen line or a rate spike becomes a housing problem, while a personal term loan carries no such link.
Where each one fits
Use a HELOC when the spending is staged: a renovation with contractor draws across months, a series of tuition bills, or a business with uneven cash flow. The ability to borrow, repay, and borrow again matches that shape, and the interest-only payment keeps the cash flow low while work is in progress.
Use a term loan when the total is known up front: a car, a consolidation, a single large purchase. The fixed payment and finish date make the budget predictable, and the rate risk disappears.
Run a renovation example. The kitchen costs $40,000, and the contractor bills in three draws over five months. A HELOC lets you borrow each draw and pay interest on only the drawn amount, which can beat borrowing the full $40,000 on day one. A term loan pays out the full amount immediately, and you pay interest on all of it from the start, even before the work is done.
Two cautions. First, a HELOC is not an emergency fund. Lenders can reduce or freeze lines during downturns, which is exactly when you would reach for it. The emergency fund guide explains why cash in a savings account, rather than borrowing capacity, is the real buffer. Second, the debt-to-income ratio guide matters on both applications, because the unused limit on a line of credit can affect how lenders see your obligations, and the take-home pay guide shows how much of your income is available for the payment once the draw period ends.
Run the cost comparison
The line of credit cost calculator models both structures on the same balance: the interest-only years, the repayment phase, and the total cost under different rate paths. Include the annual fee and the closing costs in the model, and test the payment at two rate assumptions, because a variable rate is a forecast, and forecasts miss. Enter the amount, the rate, and the draw period before you choose, because the $333 payment is only half the story. The banking and borrowing calculators cover the rest of the borrowing family.
A line of credit prices flexibility, and flexibility is only worth paying for when you actually use it. A term loan prices certainty. Compare the two with real numbers before you borrow.
Sources To Check Before You Act
Use primary guidance and your own records before you treat any page like a final answer. These are the source layers that should drive the decision.
- Current IRS forms, instructions, and publications for the relevant tax year
- Your actual account statements, payroll reports, entity records, and advisor memos
Questions that matter before you act
Frequently Asked Questions
A line of credit gives you a limit you can draw, repay, and draw again, usually with a variable rate and interest-only payments during the draw period. A term loan pays out once and carries a fixed payment until it is paid off.
At a computed 8% rate, the interest-only payment is about $333 per month during the draw period. If the balance then amortizes over ten years, the payment rises to about $607 per month.
Yes, twice. The rate can reset with the prime rate, and the payment jumps when the draw period ends and principal starts being repaid. Read the repayment phase in the terms before drawing.
No. The lender can reduce or freeze the line during a downturn, which is exactly when you would need it. An actual emergency fund in a savings account does not carry a variable rate.
A HELOC suits staged work with contractor draws over months. A term loan suits a one-time purchase with a fixed total. Compare the payment, the rate risk, and the fees with real numbers before deciding.