Let’s Compare Personal Loans and Lines of Credit First
In this extensive guide, I answer most of your questions about a personal loan vs. line of credit. I want to explain to you, which is easier to get between a personal loan vs. line of credit. To help you understand, first, I need to explain the differences between a personal loan vs. line of credit.
What is a personal loan?
A personal loan is for a certain amount, loaned at a certain interest rate, for a certain period. It is usually taken out by an individual. That individual is solely obligated to pay it back unless they also have a co-signer. A co-signer is a person who agrees to pay the loan back if the borrower fails to do so.
Personal loans may be “unsecured” loans. This means they may not require collateral. A lender evaluates your personal credit history, credit score, employment, and other factors. Indeed, he wants to see if you are a good risk without having the need of putting up collateral for security.
What is a line of credit?
A line of credit is an amount up to a certain limit that can be borrowed for a certain time. This money can be borrowed, repaid, and borrowed again. Repetitive cycles of borrowing and paying the money back are possible. Funds can be borrowed up to the line of credit limit as long as the credit line remains active.
With a personal line of credit, the funds, up to the allowed limit, can be accessed at any time. The borrower only pays interest on the amount of money borrowed. You can have a great deal of confidence knowing that you have the back up of a credit line for emergencies.
This is one reason why it is a good idea to apply for and establish a personal credit line. Do this even if you do not have a current need to borrow funds. Indeed, this is a hot tip! It is easier to be approved for a personal credit line when you do not have an emergency need for it. Do this before you have an emergency caused by a financial crisis.
How a Personal Loan and Line of Credit Differ?
OK, are you ready? Let me break it down for you.
First, I think the easiest way for you to understand one of the main differences between a personal loan vs. line of credit is to think about the money. How much cash will you actually be able to get and use?
Set Loan Amount for Personal Loans
A personal loan is for a certain amount of money that you need to repay. The amount you borrow is your obligation to repay, plus any loan interest for the time you use the money. Your obligation lasts until you fully repay your loan with all the interest due.
Here is an example so you can understand the math regarding how this works:
- In this example, you borrow $1,000 for a year.
- The annual percentage rate (APR) of the loan is 10%. This percentage is used to calculate the loan interest amount for using the money for a year. For this example, I am using a simple flat interest rate that does not consider compounding. Compounding is when interest is charged on the interest that is not yet paid. That is what really happens; however, for this example, I am making the math easier to work with.
- Let’s also say for simplicity, you are not required to make any payments until the end of the loan term.
- One year later, you will owe the $1,000 for the loan (principle) and the loan interest of $1,000 x 10% = $100. This is $1,000 + $100 = $1,100 in total that you will pay.
- This is the amount you must pay back one year after you get the money.
- In some cases, you can pay off the loan early without a prepayment penalty. You cannot get more money than the original $1,000 amount unless you take out another, completely separate personal loan.
Reusable Credit Within the Line of Credit Limit
When comparing a personal loan vs. line of credit, at first they might seem to be almost the same. Indeed, line of credit may be for the same amount as a personal loan. Moreover, the interest rate may be the same. On top of that, the loan period (also called the “term”) may be the same. However, the difference is, you can borrow money from the credit line, pay it back, and then borrow more. You can get more money again up to the limit of the credit line. You can do this as many times as you like while the credit line is “open.” Open means the credit line is available to you for use.
Let’s look at an example to make it easy for you to understand:
- Imagine you get a personal line of credit for $1,000.
- The loan interest APR is 10% and the credit line is available for your use for a year.
- One the first day, after the credit line is approved, you borrow $1,000.
- In three months, you have enough money to pay back $500 of the amount you borrowed. You also pay the interest that has been charged for the time you had the money so far.
- The interest on $1,000 for three months is $25, which is one-quarter of the $100 amount that would be charged for a full year at a 10% interest rate.
- In this example, at the end of the third month, you pay back $500 of the borrowed amount plus $25 for the interest. This leaves an outstanding balance of $500 still due.
- At the end of the sixth month, you need more money again. You borrow another $500 without paying anything back. Now you owe $1,000, which is the maximum of your credit line. The interest charge on the $500 balance for six months is $50 for a total of $1,050 that you owe.
- At the end of the year, your credit line expires. You have to pack back what was owed before, $1,050, plus the interest on the $1,000 borrowed for six months of $50. This makes a grand total of $1,100.
Notice in this example, over the course of the year, you borrowed $500 + 1,000 = $1,500 and you paid $50 + $100 = $150 in interest.
A personal credit line is sometimes called a revolving credit line because the loan amount can go up and down as you back pay some borrowed money. Money can be borrowed, paid back, and then borrowed again.
How a Personal Loan and Line of Credit are Similar?
Comparing a lines of credit vs personal loans shows that they both affect a person’s credit history and credit rating. A lender usually reports both of these types of loans to the three main credit bureaus of Equifax, Transunion, and Experian.
Credit History for Personal Loan vs. Line of Credit
These independent third-party credit bureau systems maintain records about an individual’s personal credit history. They will record the information that they get from a lender about when and how you pay back your loan(s). They record how the payments are made, in what amounts, and if they are paid on time.
If you are late in making a payment, this will become part of your personal credit history record. If you do not pay a loan when you are supposed to pay it, you will be in default. That will show up on your credit history. If you go bankrupt, that also becomes a part of your credit history record.
Credit Score for Personal Loan vs. Line of Credit
Each one of these agencies gives every person a credit score that is based on a number of factors. These factors include how much you have borrowed and how well you do in paying the money back.
Having a good credit score is very valuable. This helps you qualify for loans you may want in the future. A better credit score usually means that there is less risk that you will default on a loan. This usually results in getting lower interest rates on loans. This can save you a lot of money over a lifetime. The amount you save by having a good credit score could be in the many thousands of dollars.
Landlords, Employers, and Utility Companies
Most landlords and employers check an individual’s credit history and credit score. They must get written permission from you that allows this. These entities conduct this background check before they will rent you a house or an apartment or offer you employment. They want to make sure you don’t need help paying the rent or simple won’t pay based on your credit history.
Utility companies will usually check a person’s credit history and credit score before turning on service. If the person’s credit history and credit score are bad, they may demand a large security deposit. This deposit is paid up front before they will turn any service on.
A bad credit rating is something that usually causes lots of problems. Avoid this happening by never borrowing more than you can afford. Always pay back what you owe for all of your loans according to the repayment schedule on time. If you already messed up, work with a credit counseling and credit repair service. Choose one carefully that is legitimate with a good reputation. They help you to improve your credit score.
Now that we have a good understanding of the difference of a personal loan vs. line of credit. Let’s answer the question…
What is easier to get a personal loan or a line of credit (LOC)?
The ease of qualifying for a personal loan vs. line of credit is pretty similar. You may need to first talk with a company offering personal installment loans. Then, you may want to talk with a line of credit loan shop to make the comparison. Some companies do both.
Qualifying depends on your credit history and credit score. They will also consider the amount of the loan or credit line that you request. They will want to know the length of time the funds are needed. Then, they think about whether you can handle the repayment schedule.
Qualifying for a personal loan may be slightly easier than getting a credit line. This is because the personal loan is paid back in installments. This benefits the lender by reducing the loan exposure over time as part of the loan is paid back.
Having a credit line can be used, up to its limit, at any time until it expires. If a person’s financial situation changes substantially, they still have access to an active credit line. They can use it up to its limit without needing a new approval from the lender. This increases the risk for the lender.
Best Reasons to Choose a Personal Loan
A personal loan is the best choice if the amount of money you need is a specific amount and time you need to have the borrowed money is certain.
- Here are some good reasons to get a personal loan:
- You need a loan to buy a used car, motorcycle, sports bicycle, or mountain bike.
- Pay school tuition.
- Cover an emergency.
- Get healthcare needs covered.
- Pay for dental care.
- Pay for cosmetic surgery.
- Get eye care, contacts, or Lasik eye surgery.
- Have plastic surgery done.
- Renovate a room in a home.
- Put in a spa, a hot tub, or a swimming pool.
- Move to another location.
- Consolidate other debts into one loan with a lower interest rate.
- Pay taxes.
- Go on vacation.
- Get married.
- Have a baby.
Best Reasons to Choose a Line of Credit
Choose a line of credit vs. a personal loan if you need funding on an ongoing basis.
Here are some good reasons to get a line of credit:
- You can borrow only what you need at the moment you need it.
- You pay interest only on the amount of money you borrow.
- Some lines of credit have flexible repayment options.
- You have immediate access to available funds up to the maximum borrowing limit.
- Usually, a personal credit line has a lower interest rate than credit cards.
- Collateral may not be required.
- If collateral is provided (this is called a “secured loan”), the interest rate may be lower.
- Usually, the use of borrowed funds is not restricted.
- A credit line is useful for projects when the actual costs are not yet determined.
- Great for covering emergency needs.
- Useful for a home-based business.
- Buy equipment when needed.
- Make things for sale by buying supplies.
- Buy inventory to sell it.
- Pay for things until you get a year-end employment bonus.
- Want to rapidly build up a good credit history by borrowing and repaying quickly.
- Having available credit that is pre-approved for emergencies or opportunities.
- Not needing to re-apply for every loan amount needed.
- Use credit line funds to place cash deposits where needed (auctions, real estate sales, storage unit sales etc.).
- Have the flexibility to negotiate purchases without worrying about qualifying for financing each time.
Where to Get a Personal Loan
Loanry is a good resource for advice about personal installment loans and for getting a referral to a lender. Loanry is not a lender; they are a referral service. They give good help and advice about a personal loan vs. line of credit and referrals to companies that offer personal loans and others that are a line of credit loan shop.
Loanry helps you find potential lenders so you can check out their offers. Then, you get sent to a lender that may be able to help your needs. There is no sales pressure or obligation.
Lenders like to use Loanry because they get qualified leads like you, who are people looking for loans. This is a win-win scenario. I think you will be very satisfied with the results if you give the Loanry system a try. They have tips on how to improve your odds of getting a personal loan.
Using Loanry is much more convenient than searching all over the Internet to find a good lender. You are able to use their tools to compare personal loan rates for different lenders easily and quickly. You if feel more confident giving your personal information to request a loan then they will help you find a lender.
Loanry’s main goal is helping people with their financial wellness by providing financial information and financial educational support. Responsible borrowing is the goal for you to have the most benefits from using their services.
William Vinson has been a professional writer for more than 35 years. He is also a seasoned financial professional and raised significant capital for the startup of over 30 companies. He has expertise in real estate, insurance, financial planning, and investment management. He wrote thousands of articles for publication on major websites. All of his earnings from writing are used to support the charitable efforts of the Willivision Foundation that helps the elderly and does animal rescue.