When life throws an event your way, whether planned or unexpected, one of your first thoughts might be to go the credit card route to help manage the expense. But opening a credit card isn’t the only way to access funds. Personal loans and personal lines of credit can be viable options as well.
How they differ
A personal loan is a fixed amount that’s distributed in a lump sum, usually to take care of a one-time payment. Getting an unsecured personal loan, with no collateral attached, means you’re not putting specific assets such as a car our house at risk.. A personal loan is repaid at a fixed interest rate over a fixed period of time.
Personal loans are normally used for…
- Paying down credit card debt
- Financing a large purchase
- Paying for a wedding
- Paying off student loans
Personal line of credit
A personal line of credit functions much like a credit card — if you have needs that require ongoing purchases. You’re given a maximum amount and can borrow against that amount as you need to. Personal lines of credit could work if you might not have a clear idea of the total cost or how long you’ll be paying toward something.
Line of credits are normally used for…
- Home improvement projects
- Overdraft protection
- Emergency situations
- Supplementing irregular incomes
How they align
Personal loans and personal lines of credit both require you to pay interest. But they both allow you to pay expenses without annual fees, like credit cards.
A “good” to “excellent” APR is considered to be around 4.29%. But finding the best personal loan for you depends on the lender and your situation.
Though personal lines of credit are very similar to credit cards, you can generally find that interest rates on lines of credit may be higher on average. This is usually due to lines of credit being of greater risk to the lender than a credit card. However, the advantages of having a personal line of credit — including flexibility and a relatively easy application process — could prove worth it, depending on your borrowing needs.
Keep in mind
Before you decide to borrow with either a personal line of credit or a personal loan, determine your need. There is a credit evaluation process for both products, so not everyone is automatically eligible.