What is the Difference Between a Personal Loan and a Line of Credit?
The main difference between a personal loan and line of credit is that a line of credit is revolving, and a personal loan is not. Personal loans are fixed-rate loans that are paid back in monthly installments. These loans are commonly used for large purchases or debt consolidation. Lines of credit are better if you need access to funds on an ongoing basis –like a credit card.
What is a Line of Credit and How Does It Work?
A popular line of credit is the credit card. Credit cards are useful because they can be used continually for a variety of purposes. Once you start using your line of credit, any outstanding balance will accrue interest until paid off.
For example, if your line of credit is $10,000, but your unpaid balance is $300, interest will accrue on the $300 balance.
Pros of Obtaining a Line of Credit
- Immediate access to funds when you need it
- The line of credit is reusable
Cons of Obtaining a Line of Credit
- The risk of overspending
- The temptation to only make the minimum monthly payment
- In many cases, the interest rate is variable
How Do Personal Loans Work?
Personal loans may be used to fund major projects at a fixed interest rate. With low-interest rates and fixed monthly payments, personal loans are great for those who are looking for consistency in repayment. Personal loans offer fixed interest rates, meaning your rate will not adjust throughout the life of the loan.
If you get approved for a $4,000 personal loan, your monthly payments will remain the same throughout your repayment term.
Pros of Obtaining a Personal Loan
- The same monthly payment for the life of the loan, allowing you to budget responsibly each month
- Getting the funds you need at one time for major purchases
- Typically, you could expect lower interest payments than some lines of credit over time
- Upon approval, there is a quick turnaround time to get funds, fast
- A great way to refinance your credit cards
Cons of Obtaining a Personal Loan
- If you need additional funds, you’ll need to apply for another loan
- The temptation to use newly paid off credit cards, essentially racking up more debt
Which Is Better: Line of Credit or Personal Loan?
When comparing a personal line of credit vs personal loan, be sure to keep your goals top of mind, as well as the cost associated with obtaining a loan, and the ease of the process.
- Do you need access to recurring credit, and are OK with paying interest on the outstanding balance each month? A line of credit may be your best bet.
- Do you just need a one-time sum of cash and are OK with making fixed monthly payments? A personal loan may be your best choice!