The personal loan vs. personal line of credit debate touches on two of the most popular ways to borrow money. Both these lending methods are different, and prospective borrowers benefit from knowing these differences.
When you take out a loan, you receive your money upfront and make monthly payments over a set term. A line of credit works a little differently, allowing you to take out the money on an as-needed basis.
Neither of these options is a one-size-fits-all solution because everybody has different circumstances. Your financial habits will play the biggest role in deciding which path to take.
What Are the Differences Between Loans and Lines of Credit?
Both these lending products serve similar purposes in many cases. Your lender will have terms that you must agree to, and the money will be yours to use. The terms make the biggest difference in these types of products.
How Do Loans Work?
Loans use a fixed amount distributed as a lump sum. In most cases, loans are used for single, large expenses. Fixed monthly rates are typical of these types of loans.
Examples of popular uses include:
- Paying for weddings or vacations (or some combination of the two!)
- Providing funding for a big purchase, like a new appliance
- Paying down or paying off credit card debt
How Do Lines of Credit Work?
Lines of credit have many similarities to credit cards, including variable interest rates and borrowing limits. When you have an expense where your costs aren’t clear or have multiple purchases to make over time, credit lines might be your best strategy. Although the interest rates are variable, you’ll only owe on what you use.
Some of the examples of situations ideal for lines of credit include:
- Giving freelance or gig income a boost
- Protecting yourself from getting overdrawn
- Lengthy home improvement projects
Personal Loan vs. Personal Line of Credit: How Do You Decide?
Deciding between a personal loan vs. a personal line of credit largely rests on your need level. Choosing the wrong product will make it more difficult to reach your goals.
Here are the main similarities between these products to keep in mind:
- Similar requirements for approval
- Your credit score is affected by applying
- Interest payments are involved with both products
However, the differences between these products will likely be what helps you make your decision. If you have ongoing expenses, you might benefit from a line of credit. One example of a situation where a line of credit s helpful is a home improvement project with varying costs. Although the interest rates vary, you’ll only owe interest for what you’ve drawn.
A personal loan, on the other hand, might be best when you need a larger sum of money on a one-time basis. Examples might include paying off credit cards or making a large purchase for an essential item. These loans have consistent payments that make it easier for you to manage your spending during the loan’s life.
Personal Loan vs. Personal Line of Credit: What Are Some Final Considerations?
Knowing your credit score is essential, regardless of which of these products you decide to go with. When you know your credit score, you will have a better idea of the amount you are eligible to get. If you may need to borrow more money in the future, knowing your score so you can improve it, as necessary, is very helpful.
It’s helpful for you to have realistic expectations of what you can afford to repay on your current income. A job loss, even if the circumstances end up being temporary, may have a severe impact on your ability to repay your debt. If possible, it’s better to err on the side of caution in the amount that you take out.
Cash Link has loans and lines of credit products to suit your financial needs. A personal loan vs. personal line of credit decision is important, so contact us with any questions.