Line of Credit vs. Personal Loan
A personal line of credit gives you ongoing access to cash that you can borrow when you need. A personal loan gives you the money in one lump-sum distribution. Here’s how to know which to choose.
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At first glance, a personal loan and a personal line of credit may look similar. They both offer you access to money, whether you need it for an emergency, a home improvement project, or to fund a major life event.
But personal loans and personal lines of credit come with significant differences that affect how you borrow the money and how repayment works. This guide will walk you through what you need to know to determine which is right for you.
In this guide:
- Personal loan vs. line of credit: At a glance
- What is a personal line of credit?
- What is a personal loan?
- Which is better: Line of credit or personal loan?
Personal loan vs. line of credit: At a glance
Details for personal loans and personal lines of credit will vary based on the lender, but some basic details about the two include:
| Personal Loan | Personal Line of Credit | |
| Amounts | Fixed loan amount, generally up to $100,000 | Revolving limits up to $500,000 |
| Terms | Fixed repayment term length | Draw terms followed by a fixed repayment term length |
| Interest Rate | Typically fixed | Typically variable |
| Repayment | Fixed monthly payment | Fluctuating |
| Fees | Origination fee, late payment fee, pre-payment fee | Application fee, annual fee, origination fee, late payment fee, pre-payment fee |
What is a personal line of credit?
In simple terms, a personal line of credit gives you access to borrow money when needed, similar to a credit card. One of its primary benefits is a variable interest rate that is usually lower than what you would pay on a fixed-rate loan.
You only use as much of the line of credit as you need, so you only take out a portion of the line of credit as required. Additionally, you only pay interest on the amount that is used.
Pros & cons of a line of credit
Pros
- Instead of withdrawing a lump sum, you only borrow what you need, when you need it. You only pay interest on the amount outstanding.
- A line of credit offers the option to access money quickly in case of an emergency.
- You may see your credit score improve when you’re approved for the line of credit, as your credit utilization is lower.
Cons
- Fluctuating monthly payments can make it difficult to budget for repayment.
What is a personal loan?
Personal loans are loans offered by private lenders for certain personal reasons. These reasons vary, but the purpose of the loan is what distinguishes it from other loans such as mortgages and student loans.
They can be used for credit debt consolidation, surprise medical bills, a vacation, and many other things.
Typically, personal loans are characterized by higher interest rates because in many cases, they are unsecured without collateral. Despite this distinction, there are still secured personal loan offers out there, which typically come with lower interest rates.
Pros & cons of a personal loan
Pros
- The fixed and steady repayment schedule is clear and makes budgeting for your repayment easier.
- If you need all the money at once, you can receive it upfront.
- You aren’t tempted to continue borrowing more and more money—you receive a fixed amount and if you need more, you’ll need to apply for another loan.
Cons
- The entire loan amount is distributed at one time, so if you don’t need all the money immediately, you’ll end up paying more in interest than necessary
Which is better: Line of credit or personal loan?
Both a personal loan and a personal line of credit can be helpful when you need access to money. Whether you take out a personal loan or line of credit depends on several personal factors. Here are some scenarios where one or the other might be a better fit.
When a personal line of credit is better
When should you consider a personal line of credit rather than a personal loan? These are situations where a personal line of credit may be a better option.
- If you need an emergency fund: If you want to have cash to access in an emergency without having to rely on a credit card, a personal line of credit will give you access to money quickly.
- If you have irregular income: Managing money when your income fluctuates can be challenging. A personal line of credit can help you get through those months when your income is low.
- If you don’t know how much you need to borrow: When you know you’ll need to borrow money but you’re not yet sure how much, a personal line of credit allows you to borrow as you need it so you’re not taking out too large a loan.
- If you want to finance a home improvement project: When you start a home improvement project, you won’t always know how much you need to borrow. A personal line of credit lets you borrow money as it’s needed to finance a home improvement project.
- If you want a quick boost to your credit score: Credit utilization is one factor that determines your credit score. By taking out a personal line of credit, but not yet borrowing much against your limit, you should expect to see your credit score get a little boost.
If a line of credit fits your needs, make sure to compare the best personal lines of credit.
When a personal loan is better
While a personal line of credit is great in some situations, there are times when a personal loan may be a better option.
- If you know exactly how much money you need: If you know you’re going to need a fixed amount all at one time, a personal loan is a great option to have access to the money immediately. This is especially convenient for large sums.
- If you want to consolidate debt: If you have high-interest debt that you want to consolidate, like credit card debt, a personal loan is a better option than a line of credit. You can use the personal loan to pay off the amount of your outstanding debt and you won’t be tempted to continue to rack up debt with a revolving line of credit.
- If you want to finance a wedding or a vacation: When you have a set budget in mind for a big expense, like a wedding or vacation, it might be better to get a lump sum all at once with a personal loan.
If a personal loan fits your needs, make sure to compare the best personal loans.
