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@chriscastgarcia/Twenty20

What is a line of credit? It’s a valid question to consider when you’re trying to manage your expenses. Some people have even mistaken personal loans for personal lines of credit. So, what’s the difference and how are these viable options when it comes to your finances? Let’s explore each of these financial tools in greater detail.

How they differ

Personal Loans

Unlike a personal line of credit, personal loans consist of a fixed amount of funding handed down in a lump sum. They are generally used for one-time payments and, in the case of unsecured personal loans, do not require collateral. 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 line of credit

If you are trying to manage a purchase and you aren’t quite clear on the overall scope of costs, then a personal line of credit would be an ideal solution. A personal line of credit, like a credit card, gives you a maximum borrowing amount and is most ideal for ongoing purchases.

Personal lines of credit are normally used for…

  • Home improvement projects
  • Overdraft protection
  • Emergency situations
  • Supplementing irregular incomes

Differing interest

When it comes to what is a line of credit APR compared to that of personal loans, you’ll often find that the former has higher interest rates on average. For personal loans, a “good” APR is somewhere in the neighborhood of 4.29%, but finding the best personal loan for you depends on your financial needs and the lender.

The interest rates for personal lines of credit are generally higher because they involve greater risk on the part of the lender. That being said, the application process for lines of credit tend to be easier than that of personal loans.

How they align

In the discussion of personal loan vs. personal line of credit, you’ve seen how they differ. But, have you ever wondered how they align? They both require you to pay interest, which we touched upon in the previous section. Additionally, they can both be utilized for paying off your expenses without worrying about annual fees. Furthermore, they each involve a credit evaluation process to determine eligibility.

Keep in mind

Before you choose a side with personal loan vs personal line of credit, be sure to determine your level of need. Each method has its particular strengths and you’ll want to pick the one that best suits your intentions.

PERSONAL LOANS RESOURCES: Learn more about personal loans and what they can be used for!