Personal Loan Vs. Credit Line: How to Choose

  • Personal loans and lines of credit are two ways to raise cash for any purpose.
  • A personal loan lets you pay the entire amount upfront and it can be good when you know how much you need.
  • If you plan to use the cash when you need it and aren’t sure of the total amount, a line of credit may be best.

There are all kinds of loans available to suit specific needs in life, such as paying for college, financing a new car or buying a home. When you need money for reasons that don’t fit into any of these specific categories, a personal loan or line of credit can be a good option.

“Both personal loans and lines of credit offer two different ways to reach the same end goal – borrowing,” says CFP® professional and founder Dani Pascarella. One XI Financial Wellness,

You can use money from a personal loan or line of credit for anything.

Personal Loan Vs Line Of Credit: At A Glance

While both options are available if you need to borrow money, there are significant differences in how to obtain and use personal loans and lines of credit.

  • personal loan There are one-time installment loans that you can use for any purpose, such as paying for an emergency expense, a home appliance, or even consolidating debt.
  • lines of credit Allow you to borrow and make payments on an ongoing basis. You can borrow up to the maximum sanctioned amount based on your credit history.

What is Personal Loan?

With a personal loan, you get the approved amount in one lump sum and then make monthly payments till you make the full payment. Those payments include the principal amount or the amount you borrowed, along with interest.

When applying for personal loanMajor things to consider include:

  • Credit and Income Requirements
  • Rate of interest
  • Fee (if any)
  • Terms, including how long you have to pay it

“A personal loan makes sense when you know how much money you need to borrow,” Pascarella says. “Borrowers prefer this approach because there is a clear end date when this loan will be paid in full, and the fixed monthly payment makes it easy to add the loan to the household budget.”

Personal loans are usually unsecured, which means that the biggest determining factor in approval is yours. credit score, The higher your credit score, the more likely you are to be approved at the lowest interest rate available. For bad and fair borrowers, you may have a hard time getting approved and if you do, it could result in a higher interest rate.

If you are having trouble qualifying for an unsecured personal loan, some banks offer secured loans. Secured personal loans are backed by collateral just like other types of secured loans, but for personal loans, they are slightly different. they are backed by your savings accounts or certificate of deposit(CD) Account. Your loan will usually be a percentage of the account balance, determined by the bank or financial institution you go to.

Rate of interest Personal loans are usually lower than for loans, but this depends on your creditworthiness and the lowest interest rate you should be offered to prove how responsible you are as a borrower.

When is a personal loan better than a line of credit?

A personal loan may be better than a line of credit if:

  • You know exactly how much you need. If you have a specific goal in mind, such as buying a new device or paying off outstanding medical debt, a personal loan may be just what you need to cover your expenses.
  • You want to make consistent monthly payments. Personal loans have fixed interest rates, which means you will pay the same amount every month for the life of the loan. If your budget is very low and your budget is very less, then personal loan can be a better option.
  • You are consolidating debt. If you have a lot of outstanding with high interest rates, you can consolidate it with a personal loan. You will borrow the entire amount you wish to pay. When you get the lump sum amount, you’ll pay off all your debt and then make a monthly payment to your new lender.

example of personal loan

Let’s say you’re planning a wedding reception, and the venue needs to be half the cost. Maybe you’ve saved some for your big party, but you might not have enough to cover a large, one-time expense. You can take out a personal loan to cover the venue deposit and then make manageable monthly payments to repay it.

What is a Line of Credit?

A line of credit is a flexible funding option that you can use when you need revolving access to cash.

With a line of credit, your lender sets the maximum amount you are eligible to borrow. You can then borrow as little or as much as you can. In most cases, if you pay off the entire balance by your monthly due date, you can avoid paying interest. You will need to make a minimum monthly payment to remain in good standing. You pay interest only on the amount you borrow—not the entire amount you’re approved for.

Most lines of credit are vulnerable, which means you don’t need collateral. Credit cards are a good example of this. Lenders use your credit history, credit score and other factors to determine how much you can borrow and at what interest rate. However, some lines of credit, such as a home equity line of credit (HELOC), are secured by using your home as collateral.

Personal lines of credit have a draw period, where you can borrow as needed and start making payments. Then there is a repayment period during which you cannot borrow until the balance is paid off in full. Credit cards allow you to borrow up to the maximum amount for which you have been approved. If you reach that limit, you can’t borrow any more until you’ve made payments that reduce the principal balance.

“If you’re looking for flexibility in borrowing, when you borrow those funds, or your repayment plan, a personal line of credit is a great option,” says Pascarella. “As long as you meet the minimum monthly payment, you can repay the loan in your desired time frame.”

When is a line of credit better than a personal loan?

A credit line is a good idea if:

  • You are not sure how much money you will need. If you have a vague idea of ​​how much you want to borrow, but think you may need more, a line of credit gives you the option to use more when you need it.
  • You can pay in full. Interest rates for personal lines of credit and credit cards run higher on average than for personal loans. Interest rates apply when you carry a balance month after month, so if you pay your balance in full by the due date, you can essentially borrow interest-free.
  • You want to use it for a long time. Lines of credit can be maintained for several years. For personal lines of credit, this can be around 15 years, while you can maintain a credit card account for decades. If you want the option to withdraw from the account for several years to come, a line of credit is a better option.

example of a line of credit

Let’s say you’re getting married and, in addition to a big venue, your florist and caterer also need a deposit for the big day. Coming up with multiple expenses – and some you’re not sure about – you can use a personal credit line to transfer money to your bank account and make deposits on time.

You can use a credit card to cover minor expenses during the wedding planning process or offer generous cashback to make larger purchases. For example, you can use a travel credit card to book a honeymoon and in the process, you earn a free flight through earned points.

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