Equity Loan versus Equity Line of Credit

If you have decided to get yourself an equity loan, your next choice will be to decide between a lump sum equity loan or an equity loan line of credit. Of course, in order to make this decision, you need to know the differences between the two and the pros and cons of each.

The Pros and Cons of a Lump Sum Equity Loan

A lump sum equity loan is one that involves providing you with a specific amount of money up front. You cannot draw more money from the loan beyond the lump sum amount the financial institution gives you. If you have a one-time large expense that needs to be paid, such as construction on your home or paying for a wedding, a lump sum equity loan may be the best choice for you.

A lump sum home equity loan only provides you with money at one time. So, if you need to get more money down the road, you cannot get more from the loan. Therefore, if you think you will need more money later, a lump sum equity loan may not meet your needs.

The perk to a lump sum equity loan is that you will be provided with a regular monthly repayment amount. Therefore, you will always know how much money you need to pay every month, which will make it easier for you to budget accordingly. In addition, you know exactly how long it will take to pay the loan back and how much you will be paying in interest

The Pros and Cons of a Home Equity Line of Credit

A home equity line of credit allows you to continue drawing money during the length of the loan, so long as you still have credit remaining in the loan. If you are working on a long-term construction project that requires accessing money periodically, a home equity line of credit might be a better option. The same is true if you have college expenses to pay that will require periodically accessing large amounts of money each semester.

A home equity line of credit allows you to have more flexibility than a lump sum home equity loan because you can draw out money as you need it. So long as you continue paying on the loan and have credit available on the loan, you can continue drawing out money.

On the bad side, a home equity line of credit make it more likely for you to remain in debt as you pay on only the interest and not on the principal. This is because, just like a credit card, you will be assessed a monthly minimum payment that is equivalent to the monthly interest. You can pay beyond the minimum payment, however, in order to pay off the debt more quickly. In addition, by paying beyond the minimum payment and paying toward the principal, you give yourself more credit against which you can borrow later.