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Personal Loan vs. Personal Line of Credit

A personal line of credit and a personal loan allow you to borrow money for almost anything your heart desires. However, they work in a very different way. This is what you need to know if you are trying to decide whether a line of credit or personal loan would be better for your situation.

What is a personal line of credit?

What is a personal loan?

How to choose between them

What is a personal line of credit?

A personal line of credit is a type of revolving credit like a credit card. In most cases, a personal line of credit does not require any collateral, such as a car title or house with equity. Rather than using a piece of plastic that you insert or swipe to use your credit, you usually transfer funds to a bank account, get an advance at  branch, or use line of credit checks to gain access to your line of credit.

Like a credit card, you will be able to borrow money on your line as often as necessary, provided you do not exceed the limit on the line of credit you have obtained. You will have to make payments depending on the balance owing and the terms of your line of credit. Generally, your minimum payment will be the greater of a predetermined amount, such as $ 25, or a percentage of the balance owing, such as 1%, plus interest, fees or other charges.

The interest rate on a personal line of credit is usually variable, which, together with a balance due, makes its payments less predictable than those with a personal loan. Interest rates on lines of credit are often higher than interest rates on personal loans, ranging from 5% to 17% above the prime rate. Some lenders allow you to make a guarantee if you want to get a lower interest rate. In addition, many lines of credit charge annual fees to keep the line of credit open. In general, personal lines of credit limits range from $ 1,500 to $ 100,000, but higher amounts can be obtained.

What is a personal loan?

Unlike a car loan or a mortgage, you do not have to make a guarantee for a personal loan, you can have the option. Some lenders offer secured personal loans that allow you to build a guarantee if you want to get a lower interest rate. When you borrow money through a personal loan, you will have the money to use as you please.

Personal loans are generally issued with a fixed term, usually one to seven years, and a fixed interest rate, which means that you will have predictable fixed payments for the entire term of the loan. However, it is possible to find personal loans with variable interest rates if you prefer. Rates vary from 2.49% to 36%. Interest rates on personal loans are generally lower than personal lines of credit, as there is less uncertainty for the lender. You can borrow as little as $ 1,000 or up to $ 100,000 or more in rare cases.

Choose between a personal line of credit and a personal loan

Personal loans and personal lines of credit both have their own plus points. Although you can use these types of debt interchangeably in many cases, there is usually a clear winner when you review the details of your situation. Here’s how you can determine what’s best for you.

When to choose a personal line of credit

A personal line of credit is best for you when you may need access to funds on a recurring basis as needed, rather than as a lump sum. If you work on commission or if you are self-employed, you are probably familiar with the treatment of variable income. A personal line of credit would allow you to borrow funds to cover your expenses during low income months, while allowing you to repay the line of credit during high income months.

Likewise, a personal line of credit offers greater flexibility if you are working on a project that has a total cost undefined, such as a home improvement project whose final price is unknown. With a personal line of credit, you can borrow money in stages, depending on your needs. This may be better than paying interest on a lump sum from a personal loan, when you may not need the full amount you borrowed.

When to choose a personal loan

A personal loan is the right choice when you know how much money you will need and there is little or no chance of requiring additional funds in the future. For example, when you want to consolidate your debts, you usually know exactly how much you owe before borrowing. This knowledge saves you money because you do not need the flexibility of a line of credit and do not have to pay the higher interest rate that often leads to it.

Other uses of personal loans include the payment of:

  • Major repairs of cars.
  • Home improvement projects with strict budgets.
  • A wedding with a strict budget.
  • Medical bills.
  • An unexpected tax bills.

All of these uses usually require payment in a short period of time. It is therefore not necessary to be flexible to draw several times on a line of credit. Instead, you can get a lump sum covering all costs with a single loan transaction.

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