What is the Difference between a Personal Loan and Personal Line of Credit?

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Regardless of what you’re trying to fund, whether it’s a new car, home or degree at college, you have explored options for covering the costs. Two options, a personal loan and a personal line of credit, likely have appeared on this search. While these two options can offer you a pathway to financial pursuits, they are definitely not the same. Understanding how they differ can help you to choose the best option for yourself.

Amount

When it comes to a line of credit and a loan, you likely want to know how much money you can procure. While the answers will vary, you are probably going to have the ability to get a larger amount of money if you choose a loan.

People typically take out loans when they need to cover larger expenses. For example, you might want to pay for the tuition at a four-year university or get a mortgage. A credit card is unlikely to offer that much money. Credit cards typically have lower spending limits on them, especially when you are opening up cards for the first time.

Revolving Credit

Understanding the concept of revolving credit is imperative when you’re deciding between a personal line of credit and a personal loan. A personal loan is provided for a set amount of money.

Once you have procured the loan, you do not get more money from the lender. You use the loan for what you had intended and repay the money. A personal line of credit, however, offers revolving credit. Once you pay off the amount on the card, that credit is available to you again.

Effect on Credit Score

When pursuing these options, many individuals are concerned as to what effect the line of credit or loan will have on their credit score. You really need to examine the specific options that you’re considering in order to have a truly accurate answer. However, in many cases, loans are better for credit scores than lines of credit. Once a loan is paid off, it’s down.

With a line of credit, however, you can keep adding on purchases, which can decrease the amount of available credit that you have. On the other hand, if you are smart about paying off your credit cards in full each month, a line of credit can bolster your credit score because the credit check will reveal how much available credit you have.

Application Process and Purpose

The application process for both of these opportunities can prove quite similar. However, with a loan, the lender might require you to supply the reason that you’re requesting the loan. According to a recent report issued by Courtesy Loans, people take out loans for several common reasons, including the following:

  • mortgages
  • tuition
  • purchase of a vehicle
  • repairs to the home
  • debt consolidation

Of course, people take out loans for other reasons too. When you apply for a loan, you will probably have to supply your reason for application. The same is typically untrue for a line of credit. During the application process, you absolutely must look into the interest rates. You don’t want to end up spending a ton of extra money because you ended up with bad interest rates. Do note that loans tend to have lower interest rates than lines of credit.

Debt Payment Plans

If you have ever had a credit card before, you then already know how you will make payments toward the line of credit. You will typically make one payment per month based on how much you have spent. The goal, of course, is to pay more than the minimum so that you do not find yourself drowning in debt. With a loan, you will determine a monthly payment with the lender and the number of months in that repayment plan.

Before you sign up for a loan, make sure no penalties exist for prepayment. In other words, some lenders will charge you a fine if you pay the loan off early.

Clearly, these two means to financial ends have some different features. Speaking with an accountant or a financial advisor is a smart way to determine which one is the best for you, your financial needs and your financial abilities.