What is a line of credit? When you’re trying to manage your expenses, it’s important to know the answer to that question. Some people think personal loans and personal lines of credit are the same, but they’re not.
So, what’s the difference and how are these two products viable options for fixing your finances? Let’s explore each of these tools in greater detail.
Personal loans consist of a fixed amount of funding distributed in a lump sum. They are generally used for one-time expenditures. In the case of unsecured personal loans, there is no collateral required.
Once you are approved and sign for the loan, the lender deposits the loan amount into your bank account or otherwise gives you the entire principal of the loan. Repaying a personal loan usually takes place over a fixed period of time at a fixed interest rate.
Personal loans are normally used for…
- Paying down credit card debt
- Financing a large purchase
- Paying for a wedding
- Paying off student loans
Personal lines of credit
If you are trying to manage a purchase and you aren’t quite clear of the overall scope of the costs, then a personal line of credit could be an ideal solution. How does a line of credit work? A line of credit, like a credit card, is an unsecured revolving credit line, with a credit-line limit and usually a variable interest rate.
It is suited for ongoing expenses, such as a home repair project. You pay interest only on the portion of the personal line of credit that you use.
Personal lines of credit are normally used for…
- Home improvement projects
- Overdraft protection
- Emergency situations
- Supplementing irregular incomes
Personal loans vs Personal lines of credit
If you’re thinking about borrowing money from a lending company, it’s important to know the difference between a personal loan and a personal line of credit. These terms are easily confused, so let’s take a close look at each.
If you aren’t sure exactly how much money you’ll need to borrow, a personal line of credit could be an ideal solution. A line of credit, like a credit card, is an unsecured “revolving” credit line with a limit and a variable interest rate. It’s best-suited for ongoing expenses, such as an unpredictable home repair project. Like a credit card, you pay only pay interest on the portion of your credit limit that you actually use.
Personal lines of credit are commonly used for home improvement projects, overdraft protection, emergency situations, and supplementing irregular incomes.
On the other hand, personal loans are a fixed amount of funding distributed in a lump sum. They are generally used for large, one-time expenses. For unsecured personal loans, no collateral is required.
If you’re approved for a personal loan, the lender transfers the entire principal of loan amount to you. Repaying a personal loan usually takes place over a fixed period of months of years at a fixed interest rate.
Personal loans are commonly used for paying down credit card debt, financing a large purchase, paying for a wedding, or paying off student loans.
Both personal lines of credit and personal loans require a hard credit check for approval, as well as interest payments. However, personal lines of credit usually have higher interest rates, because they involve greater risk on the part of the lender.
Personal Line of Credit
$1,000 to $50,000 on average
$1,000 to $100,000 on average
|Interest rate: fixed or variable||
Fixed; variable is uncommon
Variable rate; will rise and fall depending on the market
10% to 28%
12 to 60 months
10 years on average
Never changes after the loan closes
Will fluctuate depending on interest rate movements; may come with a low promotional rate initially
1% to 8% on average
Can be charged monthly once the line is opened
Keep in mind
Before you choose between a personal loan and a personal line of credit, be sure to determine your level of need. Each loan product has its particular benefits, and you’ll want to pick the one that best suits your circumstances.
If you’re thinking of getting a personal loan, check out Bankrate’s personal loans rate table to quickly compare your options.