Personal Line of Credit vs. Personal Loan
Personal Line of Credit vs. Personal Loan: Comparison
Life can throw a lot of unexpected surprises your way — expensive surprises. Financing major purchases like home repairs on short notice could mean getting a loan or line of credit.
Let’s take a look at personal loans vs. personal line of credit to see how the two stack up.
What is a personal line of credit?
Personal loans are pretty straightforward: You receive a lump sum payment deposited directly into your bank account, and then you repay that loan — usually at a fixed interest rate — over a certain period of time.
On the other hand, a personal line of credit is a revolving credit line that you can withdraw funds from up to your balance limit. You can only take out money during the draw period and after that, you’ll need to make regular payments on your outstanding balance and any accrued interest until they’ve been repaid in full . It’s not uncommon to see a line of credit compared to a credit card, but there’s an important distinction to make.
Credit cards are open-ended, and your account can stay open in perpetuity. But that’s not the case with a personal line of credit. Your personal line of credit will have a set end date — both in terms of your draw period and your repayment period. That creates a sense of finality that you just wouldn’t find with a credit card.
Personal loan vs. line of credit
Based on the description above, a personal line of credit is a very different in comparison to a personal loan. Perhaps the most relevant characteristic they share is that both are unsecured loans. That means you don’t need to use collateral to secure your loan.
Personal line of credit
Type of debt
Type of loan
Single lump sum deposit
Revolving credit line
Fixed or variable
Origination fees, annual fees, late payment penalties, overdraft fees and other expenses
Up to 10 years
Line of credit vs. loan: When is it better to use a personal loan?
In an environment that has rising interest rates, a personal loan or other forms of fixed interest lending can be beneficial because you know what your monthly payment will be for the life of your loan. You also do not have to worry if interest rates rise. With a revolving personal line of credit or credit card, your monthly interest rate and monthly payments can increase if rates rise.
There are several benefits to using a personal loan, but the two that stand out are relatively low fixed interest rate and straightforward repayment and amortization schedule. For those reasons, you may find that personal loans are ideally suited for a few scenarios:
- Consolidating high-interest debt
- Paying for home renovations
- Financing necessary home repairs
- Covering large expenses
Consolidating high-interest debt
Digging out of high-interest debt is hard — just ask anyone carrying a large credit card balance. A personal loan can help you repay your high-interest debt in full, letting you enjoy more financial freedom. Repayment schedules can run anywhere from 12-60 months, so you’ll know exactly when you’ll finally be free and clear of credit card debt.
Paying for home renovations or repairs
Rehabbing an outdated kitchen or replacing worn-out furniture can run tens of thousands of dollars — and who wants to tie up that much money in home renovations? A personal loan makes such expensive purchases more palatable because you’ll repay the loan in monthly installments rather than pay for everything all at once.
Financing emergency home repairs
You can plan ahead for a new guest bedroom, but a broken water heater needs to be fixed now — especially if it’s leaking water in your home. That’s where a personal loan can be a huge boon for homeowners. Applying for a loan can takes only a few minutes. You may see the funds arrive in your account within just a few days of approval.
When does it make sense to use a line of credit?
Personal credit lines can be useful if you have recurring expenses that can change from month to month or year to year. Medical bills for a chronic ailment are a common expense that borrowers need help with. Since you can’t be sure exactly how much money you’ll need to pay all of those bills, taking out a personal line of credit loan could make plenty of sense.
If you’re a homeowner and have accumulated a decent amount of equity in your house, a home equity line of credit (HELOC) could be a good alternative to a personal line of credit.
Is it better to have one loan or line of credit?
Every person’s situation is different, but personal loans offer many appealing benefits that a line of credit simply can’t match. Talk to a qualified financing expert to see what you might qualify for with a personal loan.
Where can I get a personal loan?
Do you know that a personal loan is the right move for your current financial situation? Learn more about the personal loan options available from Guaranteed Rate, and get the extra financial help you need when you need it most.
* You must be 18 years of age or older. To qualify, a borrower must be a US citizen, a permanent resident, or a non-permanent resident in the US on a valid, long-term visa. All loan applications are subject to credit review and approval as well as income and employment verification. You must meet our minimum requirements established for this offer including, but not limited to, credit history, debt-to-income ratio, and application information. Your actual rate depends on your requested loan amount, loan term, creditworthiness, and a variety of other factors. Loan amounts range from $4,000 - $50,000. Rates and loan amount may differ due to state specific requirements and may impact your ability to qualify for a loan. Limitations: CA (rate and amount), FL, ME, NC, TX and VT (rate), IL, MA, RI (amount). The lowest rate advertised is reserved for the most creditworthy borrowers. Advertised rates and terms are current as of 8/10/2022 and are subject to change without notice.
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