Taking advantage of all of your financial options means understanding the subtle differences between those options. Many people misunderstand the terminology “line of credit” and “personal loan”. Although these two financial vehicles sound similar, they are, in fact, quite different. Depending on your personal situation, one tool may not serve you as well as the other.
Let’s take a look at the difference between a line of credit and a personal loan so that you can make an informed decision about how you will use both of these financial tools moving forward.
What is a Line of Credit?
The big difference between a line of credit and a personal loan is that a line of credit gives you access to a certain amount of financing on an ongoing basis. When a line of credit is open, the customer can borrow funds continually as long as they do not reach this maximum amount.
On main difference between a line of credit and a personal loan is that lines of credit are often used from your real estate equity or as a type of business loan. The contract between the borrower and the financing institution gives the borrower the ability to access the amount of money they need to purchase the property. As long as the borrower does not surpass the ceiling on the loan, they have access to the funds in the credit line.
A line of credit, or LOC, gives a borrower much greater flexibility than most personal loans. Borrowers using a line of credit can adjust how they repay a line of credit depending on the cash flow that a borrower is experiencing currently.
The LOC also allows the borrower to have access to the maximum amount of funds needed for project. However, they only pay interest on the financing that they actually spend.
What is a Personal Loan?
A personal loan is not the same thing as a line of credit. A personal loan is a much more restrictive financial vehicle than a personal line of credit. However, it does come with some advantages that you may want to consider when you are going through your choices for financing.
A major difference between a line of credit and a personal loan is that a personal loan is dispersed as a lump sum. It can have either a variable or fixed interest rate, and there is usually a minimum amount that you can borrow depending on your credit score. There may also be other factors that affect the minimum amount of money that you may take out with a personal loan.
Personal loans may also be secured or unsecured. A secured personal loan means that the money borrowed is backed by some sort of asset that the borrower owns. In most cases, this is a large asset such as a car, a boat or house. An unsecured personal loan means that the loan is not backed by any collateral.
In most cases, personal loans that are secured will take longer to approve. The lender wants to be sure that you are in full possession of the asset that you are claiming will serve as collateral for the loan. In return, you may be able to borrow more money overall at a lower interest rate. Your risk profile is much lower with a secured personal loan than with an unsecured loan.
However, some people do prefer unsecured loans because there is no risk to any personal asset. The unsecured loan also has a faster approval process in most cases, because there is no asset check it may increase the approval timeframe.
Deciding Between a Personal Line of Credit and a Personal Loan
We have gone through the major difference between a line of credit and a personal loan. There are also some similarities that you should consider before deciding on one or the other.
First of all, whichever financial vehicle you choose, you will have to qualify for it. Both of these financial tools are provided by private entities with no obligation to do business with you. You get the best terms on both vehicles if you have a great credit score. You may be able to negotiate better rates based on the individual history that you have with the financial institution, but don’t bet on it. In most cases, an automated system vets the application for a loan.
If you do not look good on paper, you may not be getting the loan. With this in mind, make sure that you fix your credit before you walk into a financial institution looking for a line of credit or a personal loan.
Line of credit vs. Personal loan: Which is best for you?
Because a personal loan is a lump sum, you will be paying for the entire loan no matter how much money you actually use. A line of credit gives you the ability to pay only on the money that you use as you need it.
A personal loan gives you the ability to obtain a fixed interest rate. If you do not want to watch the market for the best time to actually get a loan, a fixed rate is usually your best option. A line of credit forces you to pay a variable rate, which may go up depending on market conditions.
Your monthly payment on an LOC comes solely from the amount of money that you borrow. On a personal loan, the terms of repayment define your monthly payment as well as the total amount you borrowed. These terms can be advantageous or disadvantageous depending on your negotiation skills and the leverage that you have.
The personal loan allows you to spend the money on anything that you want. You can use it for a vacation, new clothes, home maintenance or anything else you can think of. The LOC is sometimes monitored more closely. People who need financing for many things but not all at once usually prefer it.
Is a Personal Loan Right For Me?
You must look at the difference between a line of credit and a personal loan before deciding if a personal loan is right for you. You must also consider the lending institution that is giving you the loan.
The terms of a personal loan can vary wildly depending on the institution that you choose to partner with.
In most cases, you should take great pains to do business with a financial institution that has a history of successful personal loans. Take a hard look at the fine print and think about it. You need to know that you will not get a package that will ultimately perform a disservice for you. Here are some of the main things to look for in a personal loan package.
The personal loan is best when you do not need or want oversight on your purchases. It is also best if you know that you are responsible with money, because you are immediately responsible for the entire loan amount as soon you take the loan. If you have a positive relationship with your financial institution for more advantageous terms, you may also get more out of a personal loan.
Make sure that you talk to a trusted financial advisor before taking a loan for large amounts of money if you want to remain financially stable. Remember that a loan is not a catchall solution for cash flow problems or financial emergencies. Loanry connects you with reputable lenders whom you can trust. Want to get offers and see what your options are? Start here:
Now that you know the difference between a line of credit and a personal loan, take the time to understand which of those tools best fits your situation. You need to know which tool to use in which situation to come out on top. No matter how many advantages a tool offers, it can only provide the benefits that you correctly use it for. If you need to shop personal loans today, you can find a lender for cash loans online right here on Loanry.com.
Ethan founded Goalry, Inc in Dec 2016 with the mission to build the world’s first and only Financial Goal Mall. One place to reach financial goals and comparison shop for any money matter. Taub invents the IP for the finance stores within the mall, while overseeing various aspects of the company. He also has orchestrated the company’s earned media across the finance stores: Accury®, Billry®, Budgetry®, Debtry®, Cashry®, Creditry®, Loanry®, Taxry® and Wealthry®. This includes over 1200 blogs, 400 videos, thousands of social post and publications that have been featured across the web.