Both loans and lines of credit allow families and individuals to borrow money. For a large, one-off purchase, borrowers can use a credit card, personal loan, a bank overdraft, home equity lines of credit, or a mortgage. However, personal loans and lines of credit have several subtle differences. It pays to know these differences to ensure you are making the right financial decisions for your personal economic circumstances.
A Revolving Account vs a Lump Sum
The biggest difference between a personal loan and a line of credit is that one is a revolving account, and one is provided as a lump sum. When you take out a personal loan, you are given the entire amount of the loan in one lump sum. You can then spend the money as you please, providing you make the regular payments you agreed with the lender.
In contrast, lines of credit are usually a revolving account. This means that you can take as little or as much as you need, as and when you need it, up to the fixed limit. You will only pay interest on the amount you have taken out of the account.
Interest Rates
Personal loans usually have a set interest rate. This rate will be agreed when you take out a loan and is a percentage of the total sum borrowed. Lines of credit, on the other hand, have a variable rate. The rates depend on a number of factors and could be linked to the Wall Street Journal Prime Rate.
To ensure you are getting the best interest rate deal on your loan, use a loan review platform like www.LoanReviewHQ.com.
Your Repayment Amounts
A personal loan will come with fixed monthly repayment figures. Each month you will be expected to make the same payment towards repaying the loan.
However, with a line of credit, you will only make payments on the amount you have borrowed. If you have only used $100 of credit, you could pay smaller figure towards repayment than you might if you had used $1000 of credit. You have more freedom in your monthly repayment figures and only have to repay the money you have spent.
Repayment Frequency
Lines of credit are far more flexible in the repayment plan. If you wish to make repayments weekly, biweekly, or monthly, you can choose to set up a repayment schedule which suits you. Also, if one month you wish to pay off more of the sum, you can.
This flexibility is not available to customers who take on a personal loan. The repayments are fixed both in value and in the timeliness of the repayment amounts.
Fees
There are usually different fee structures between personal loans and personal lines of credit. When you take out a personal loan, there is usually an up-front fee which is a percentage of the total amount borrowed. This is the only fee that comes with the loan, and once you have the lump sum, the only payments you have to make are the monthly repayments.
For a line of credit, things are less clear-cut. There may be processing fees and costs each time you withdraw on the line of credit. This varies from lender to lender. It is worth checking the fine print to ensure you understand every fee that is included in the line of credit and what circumstances incur fees.
The best option for your situation depends on what you will be spending the money on, when you intend to repay the amount borrowed, and your financial security. There is no “better” or “worse” option. Lines of credit and personal loans are both more useful and less appropriate in different circumstances.