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Personal Loans vs. Personal Lines of Credit

a woman reviews options for personal loans and personal lines of credit on her laptop.

If you’re looking for quick access to cash, both a personal loan and a personal line of credit are great options. Since there are advantages to each type of financing, it’s helpful to do a little research before deciding which one is right for you.

A personal loan gives you a lump sum payment that you pay back on a schedule, while a line of credit lets you use the funds as needed, so your payments vary from month to month. Read on as we tell you more about these two excellent personal finance options.

What Is a Personal Loan?

With a personal loan, you borrow a certain amount of money from your local credit union or another financial institution. You then make equal monthly payments over your chosen term to pay off the loan.

For example, you might borrow between $1,000 and $15,000 and choose a repayment term between one and four years.

One of the main benefits of a personal loan is that it comes with a fixed rate (based on your credit score), so your monthly payment will always be the same. This convenience makes budgeting easy.

What Is a Personal Line of Credit?

With a personal line of credit (PLOC), you get access to a certain amount of funds, and you can choose how much of that money you use at any given time during your draw period. You can pay the money back in part or in full each month, just like with a credit card.

For example, you might have a limit of $10,000. During the time that the line of credit is open, you can use any portion of the funds to meet any number of expenses.

The main benefit of a personal line of credit is that you only pay interest on the funds you use. So if you don’t use any of the money available to you in your line of credit, you won’t pay any interest.

The Similarities and Differences

When comparing personal loans vs. personal lines of credit, you’ll see some things they have in common and some things that make them unique. You can weigh these features and benefits to decide which type of financing better suits your needs.

How You Can Use the Funds

You can use both a personal loan and a personal line of credit for a range of purposes, including:

  • House or car maintenance
  • A new home appliance, laptop, or other major purchases
  • Health care, vision, or dental bills
  • A vacation, wedding, or another special event
  • Debt consolidation, like paying off multiple credit cards

How You Draw the Loan Funds

  • A Personal Loan: The lump sum payment will be deposited into your checking or savings account, or you can get a check.
  • A Personal Line of Credit: The funds will be available in your PLOC account, and you can transfer money to your checking or savings account or make a withdrawal at your local branch.

What Rates You Pay

  • A Personal Loan: You’ll get a fixed annual percentage rate (APR) based on your credit score. The higher your score, the lower your rate.
  • A Personal Line of Credit: You’ll get a variable rate based on your credit score and the Prime Rate as per the Wall Street Journal. So your rate could be Prime + 3%, Prime + 5%, or Prime + 9%.

Which Is Better For You?

If you’re still wondering whether a personal loan or a line of credit is the right option for you, these questions and answers might help you decide.

  1. Do you know exactly what you want the funds for and how much money you’ll need? If so, a personal loan could be the best choice because it gives you a lump sum payment to cover that particular expense. You can then pay it back over a term that suits your budget.
  2. Do you want a source of revolving credit to use for multiple purposes? If so, a personal line of credit could be the best choice because you can use however much of your credit you want at any given time for a range of different purposes.
  3. Do you want equal monthly payments to make budgeting simple? If so, choose a personal loan because you pay the funds back in equal parts on a monthly schedule and your interest rate is fixed, too.
  4. Do you want to have no or low payments for some months? If so, choose a personal line of credit because you can use as much – or as little – of your credit at any time. Plus, you don’t need to pay any interest in the months you have a zero balance.
  5. Do you want to keep some or all of the funds to use as a financial safety net? If so, both a personal loan and a personal line of credit can be used as an emergency fund.

Next Steps: Applying for a Personal Loan or Personal Line of Credit

Personal loans and personal lines of credit are both designed to give you convenient, affordable access to funds – to help take the stress out of life.

They’re both great choices, so the decision comes down to whether you want a lump-sum payment or an open credit line. Click below for more details on personal loans and personal lines of credit.

Personal Loans & Lines of Credit