Personal Loan vs Line of Credit
If you’re deciding between a personal loan and line of credit, we’ve got you covered. Here’s what you need to know about each.
A loan and line of credit are two different ways you can borrow. Loans have what’s called a non-revolving credit limit, which means the borrower only has access to the amount loaned once, and they subsequently make principal and interest payments until the debt is paid off.
A line of credit, on the other hand, works differently. The borrower receives a set credit limit—just like with a credit card—and makes regular payments composed of both a principal and interest portion to pay it off. But unlike a loan, the borrower has continuous and repeated access to the line of credit while it is active.
Type of Credit | Personal Loan | Line of Credit (LOC) |
---|---|---|
Loan Limits | up to $30,000.00 | up to $20,000 |
Type of Interest Rate | Fixed | Variable |
Fees | No annual or origination fees | fluctuate |
Term | up to 60 months | Ongoing; draw and repayment |
Funding Method | Lump-sum amount | Ongoing access |
Payment | Same payment amount for entire loan | Payment amount fluctuates based on Loan Balances |
Interest Accures | Interest accrues on the full loan amount right away. | Interest accrues only when funds are accessed. |
Access | The borrower only has access to the amount loaned in one lump sum. | A line of credit is a preset borrowing limit that can be used at any time, paid back, and borrowed again. |
Personal Loans Are Predictable
Personal loans come with a fixed annual percentage rate that allows the borrower to know his or her monthly payment and plan their budget accordingly.
If, for example, you need the cash for an unexpected expense like a car repair, major appliance replacement or a pet emergency, then getting that particular amount and predictable payment is a good way to handle it.
Lines of Credit Make Good Safety Nets
You can get these anytime and have the money at the ready whenever it’s needed. It can sit there untouched for years, but you won’t be paying interest.
Many people tend to use lines of credit as safety nets for unplanned costs or as overdraft protection for checking accounts.