Personal Loans and lines of credit can help a person accomplish their goals as they are the preferred way of borrowing money. In other words, these ways of financing might give us access to the funds for our needs. They serve similar purposes. But a vast difference lies in how the repayment of the borrowed funds.
Line of Credit
A line of credit has similarities with a credit card. It is known as a flexible borrowing situation. In other words, it is a revolving account allowing borrowers to withdraw, repay and redraw from available funds, usually with interest. You have a credit limit in a line of credit, and you can spend up to the specified amount. The credit gets replenished by the monthly payments done by you. Also, there are two critical phases in this way of borrowing money. The first is the draw period, in which you can borrow according to your needs, and the second is the repayment period, which starts after the end of the draw period. As a result, you can no longer be allowed to borrow more credit as the repayment period begins.
A better interest rate can be received by securing your line of credit with an asset or collateral such as a vehicle or home, and the list continues. But, at the same time, you will also be able to get an unsecured line of credit with the help of your signature. The difference lies in the line of credit being secured or unsecured.
Line of credit is usually preferred for ongoing, minor, or unanticipated expenses. A small business owner can use it for work, such as paying for office supplies and materials monthly.
In a line of credit, the interest rates are higher. But the rates keep changing over time and are not the same. In other words, lines of credit have variable interest rates. The rates depend entirely on the change in the prime rate set by the financial institution lending money to you. Interest is charged as you have access to any portion of the available funds. A lower interest rate can be attained through a high credit score.
You can borrow according to your account limit on a line of credit. The credit gets replenished through your payments. Also, lenders do not charge an early pay-off fee for personal lines of credit. They take costs related to specific types of loans.
Monthly payments can vary on a line of credit from month to month or year. It is the result of the variable interest rates.
A Personal Loan is a form of credit given to you as a lump sum. It is also known as a signature loan, as you can get it with the help of your signature. Personal Loans are unsecured, so you don’t have to secure them with an asset or collateral.
A three-digit score is referred to in a Personal Loan application, better known as your credit score. It represents a borrower’s capacity to make timely payments on credit obligations. In other words, a credit score for a Personal Loan is required to check whether the person can repay the dues. It is not right to assume that a good score is necessary for the approval of a loan or that a poor score might lead to the rejection of a particular loan. Instead, the lender considers the Personal Loan application based on some parameters. Still, the credit score for a personal loan is considered essential.
Usually considered for debt consolidation, personal loans are applied for a specified amount of cash. The money is used to pay off the credit card balances, which have higher interest rates than the loan. It can be used for significant investments or purchases, such as renovation, medical emergencies, educational purposes, or funeral expenses.
You receive a lump sum amount on taking a Personal Loan. However, these loans are sanctioned at fixed interest rates. In other words, the interest rate remains unchanged and is not variable. The interest, dependent on the credit and the lender, is paid through EMIs along with the principal amount within a specified time limit.
A fixed payment is required to repay Personal Loans, which makes budgeting simpler for the borrower.