It is easy to understand why some people get confused when it comes to a personal line of credit vs. a personal loan.
If you are thinking about one or both of these options, or just interested in learning about the differences, doing a little bit of research can go a long way.
What is a Personal Line of Credit
In simple terms, a personal line of credit gives you access to borrowed money when needed. One of its primary benefits is a variable interest rate that is usually lower that what you would pay on a fixed rate loan.
You only use as much of the line of credit that 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.
What is a Personal Loan?
Personal loans are a type of loan 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 new lawnmower, 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.
>> Read More: Best Personal Loan Rates
Line of Credit vs. Personal Loan: Similarities
The similarity between a personal line of credit and a personal loan is that they both provide you with access to money when needed. They are both provided by a private entity. However, there are far more differences between the two. For that reason, it is important to understand how each option works, including their benefits and disadvantages.
Line of Credit vs. Personal Loan: Differences
- A personal loan is disbursed as a lump sum from a lender while lines of credit are doled out in portions when additional funds are needed.
- On a personal loan, you can obtain a variable or fixed interest rate for the entire loan amount. With a personal line of credit, you have variable rate on only the funds taken out.
- The monthly payment on a personal line of credit depends on the amount borrowed. The monthly payment on a personal loan is initially defined by your repayment term and loan amount.
- With a personal loan, you can spend the money on anything you want; a vacation, car repairs, new clothes, home improvements, and so on. A personal line of credit is often the preferred choice for people who need money for a variety of things but not at one time. For example, if you have work done on your home by several different contractors, you would withdraw the amount owed to each as the job is completed.
Before deciding, you should first determine your financial needs. It is also important to note that the evaluation process used for approval is different for both options. Meaning that whether you are interested in a personal loan or personal line of credit, there is no automatic eligibility. For either one, you should have good credit if you want a better chance of a low interest rate. At any rate, there are both advantages and disadvantages to these options. A careful evaluation of your financial state and path forward is essential when deciding to take out a personal loan or line of credit.
Author: Jeff Gitlen
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