What’s the Difference Between Personal Loans and Personal Lines of Credit?

personal line of credit vs. personal loan

While it’s smart to save and budget, the realities of life don’t always make that possible. From an unexpected expense to income that fell through, sometimes borrowing is the only option. That’s when you’ll have to decide between personal line of credit vs. personal loan options.

Strategic borrowers must carefully weigh each to choose the most cost-effective credit that meets their needs. Here’s what you need to know about a personal loan or line of credit, and which is better for you.

Personal line of credit vs. personal loan: What’s similar

Both personal loans and lines of credit provide borrowers with a way to get cash when they need it. Here’s what you can expect to be the same between a personal loan vs. line of credit. 

Unsecured and secured options

For both a personal loan and line of credit, a borrower has the option of secured or unsecured borrowing.

With a secured loan or line of credit, the borrower puts up an asset to act as collateral, in case of default on the loan. Common examples include a vehicle for a car loan, or a home, as with a home equity line of credit.

There are also unsecured personal loans and lines of credit, through which lenders provide funds without any collateral required. The funds are available to be used entirely per the borrower’s discretion. This makes unsecured personal loans and lines of credit flexible credit options to get cash for a variety of purchases or situations.

Similar application process and credit requirements

The application for both a personal loan and a line of credit are similar as well. For both forms of credit, a lender will typically review an applicant’s credit history and verify their income. They use this information to approve or deny the credit, based on the applicant’s ability to repay.

Credit requirements for personal loans and lines of credit are often similar, too. Specific credit requirements and borrower eligibility guidelines vary from lender to lender, as each sets its own criteria.

Generally, however, both a personal loan and a line of credit will require good credit for approval and excellent credit for more favorable terms. If you’re looking for a higher loan balance or low interest rates, for instance, you’ll probably need a credit score on the higher end to qualify.

The difference between personal loan and line of credit funds

While personal loans and lines of credit offer similar borrowing options in some ways, they are set up differently. From how they accrue interest to how a borrower repays them, these credit options diverge on several important features.

How funds are paid out

The biggest difference between a personal loan and line of credit is how the borrowed funds are paid out.

With a personal loan, the amount borrowed is set and paid out once in a large sum. The loan holder gets all the money upfront. Often, lenders have a minimum loan amount that you must borrow, so smaller loans can be harder to get.

A line of credit, however, is revolving credit. Instead of borrowing money all at once, a line of credit allows the account holder to take out money as it’s needed. The line of credit will have a credit limit, and the borrower can take out as much or as little money as needed, up to that limit.

Interest rates

Both personal loans and lines of credit charge interest on borrowed funds, but lines of credit usually have higher interest rates than those offered on personal loans. This can make them a more costly credit option.

Interest rates on lines of credit are determined almost exclusively by the creditworthiness and income of the borrower. The rates on lines of credit are also often variable, so a lender can raise them after money’s been borrowed.

A personal loan might also have a variable rate, but it is more common to have a fixed rate that does not change throughout the life of the loan. Personal loan interest rates are typically lower than those offered on lines of credit.

Many factors can affect personal loan rates, including the length of the loan and even the amount borrowed. This gives the borrower more options to lower their interest rate than they might have with a line of credit.

Repayment

Another factor to consider when deciding on a personal loan vs. line of credit is how repayment is set up.

A personal loan has a clear, straightforward repayment system. The borrower makes regular payments (usually monthly) for a set repayment term.

With a personal loan, monthly payments are set at the beginning of the loan. The balance and interest earned on the loan are calculated, then it’s divided over monthly payments set to completely pay off the personal loan in the chosen repayment period.

Payments for a line of credit, however, are not set up for paying off the credit within a certain time frame. Lenders might have different formulas to determine monthly payments, but the system is often similar to how credit card minimum payments are decided.

Wells Fargo, for instance, sets minimum payments on a line of credit at 1% of the total borrowed balance or $25, whichever is greater. Repayment periods are also not defined and might be longer than they would be with a personal loan.

Personal loan or line of credit: Which is better for you?

When deciding between personal line of credit vs. personal loan applications, borrowers need to look at the different features and determine which would be a better fit for their situation. With a personal loan or line of credit, which is better will come down to what kind of credit you need.

When to choose a personal line of credit

A line of credit is often used by workers who have a varied income, such as a salesperson who works on commission or an independent contractor.

When their pay can vary so much month-to-month, they often have an ongoing need to borrow money and bridge any gaps in income. A line of credit offers funds to borrow that are available when needed.

A line of credit can also be a smart borrowing option when the total amount you will need is unknown, or your costs will be ongoing.

A couple planning a wedding, for instance, might not know exactly what their total costs will be. Having a line of credit means that funds are available so they can borrow what they need when it’s needed.

When to choose a personal loan

For one-time transactions, a personal loan can offer a better deal and a clearer repayment plan. With a personal loan, the borrower must know exactly how much they’ll need at the start. This way they can borrow enough to cover their costs, but not more than they need.

Personal loans are often used to cover expenses like car repairs or emergency costs. Another common use for personal loans it to consolidate or refinance other debts, like credit card debt.

For informed borrowers who fully understand the terms and risks of their loan or credit, either of these options can be a way to get cash when it’s needed. With both, however, responsible repayment is a must to ensure these products benefit the borrower.

Interested in a personal loan?

Here are the top personal loan lenders of 2018!
LenderRates (APR)Loan Amount 
1 Includes AutoPay discount. Important Disclosures for SoFi.

SoFi Disclosures

  1. Terms and Conditions Apply: SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. To qualify, a borrower must be a U.S. citizen or permanent resident in an eligible state and meet SoFi’s underwriting requirements. Not all borrowers receive the lowest rate. To qualify for the lowest rate, you must have a responsible financial history and meet other conditions. If approved, your actual rate will be within the range of rates listed above and will depend on a variety of factors, including term of loan, a responsible financial history, years of experience, income and other factors. Rates and Terms are subject to change at anytime without notice and are subject to state restrictions. SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income Based Repayment or Income Contingent Repayment or PAYE. Licensed by the Department of Business Oversight under the California Finance Lender Law License No. 6054612. SoFi loans are originated by SoFi Lending Corp., NMLS # 1121636. (www.nmlsconsumeraccess.org)
  2. Personal Loans: Fixed rates from 5.49% APR to 14.24% APR (with AutoPay). Variable rates from 5.29% APR to 11.44% APR (with AutoPay). SoFi rate ranges are current as of December 1, 2017 and are subject to change without notice. Not all rates and amounts available in all states. See Personal Loan eligibility details. Not all applicants qualify for the lowest rate. If approved for a loan, to qualify for the lowest rate, you must have a responsible financial history and meet other conditions. Your actual rate will be within the range of rates listed above and will depend on a variety of factors, including evaluation of your credit worthiness, years of professional experience, income and other factors. Interest rates on variable rate loans are capped at 14.95%. Lowest variable rate of 5.29% APR assumes current 1-month LIBOR rate of 1.34% plus 4.20% margin minus 0.25% AutoPay discount. For the SoFi variable rate loan, the 1-month LIBOR index will adjust monthly and the loan payment will be re-amortized and may change monthly. APRs for variable rate loans may increase after origination if the LIBOR index increases. The SoFi 0.25% AutoPay interest rate reduction requires you to agree to make monthly principal and interest payments by an automatic monthly deduction from a savings or checking account. The benefit will discontinue and be lost for periods in which you do not pay by automatic deduction from a savings or checking account.

2 Important Disclosures for Citizens Bank.

Citizens Bank Disclosures

  1. Personal Loan Rate Disclosure: Variable rate, based on the one-month London Interbank Offered Rate (“LIBOR”) published in The Wall Street Journal on the twenty-fifth day, or the next business day, of the preceding calendar month. As of August 1, 2017, the one-month LIBOR rate is 1.23%. Variable interest rates range from 6.02% – 15.97% (6.02% – 15.97% APR) and will fluctuate over the term of your loan with changes in the LIBOR rate, and will vary based on applicable terms and presence of a co-applicant. Fixed interest rates range from 5.99% – 16.24% (5.99% – 16.24% APR) based on applicable terms and presence of a co-applicant. Lowest rates shown are for eligible applicants, require a 3-year repayment term, and include our Loyalty and Automatic Payment discounts of 0.25 percentage points each, as outlined in the Loyalty Discount and Automatic Payment Discount disclosures. Subject to additional terms and conditions, and rates are subject to change at any time without notice. Such changes will only apply to applications taken after the effective date of change.
  2. Loyalty Discount: The borrower will be eligible for a 0.25 percentage point interest rate reduction on their loan if the borrower has a qualifying account in existence with Citizens Bank at the time the borrower has submitted a completed application authorizing us to review their credit request for the loan. The following are qualifying accounts: any checking account, savings account, money market account, certificate of deposit, automobile loan, home equity loan, home equity line of credit, mortgage, credit card account, student loans or other personal loans owned by Citizens Bank, N.A. Please note, Citizens Bank checking and savings account options are only available in the following states: CT, DE, MA, MI, NH, NJ, NY, OH, PA, RI and VT. This discount will be reflected in the interest rate and Annual Percentage Rate (APR) disclosed in the Truth-In-Lending Disclosure that will be provided to the borrower once the loan is approved. Limit of one Loyalty Discount per loan, and discount will not be applied to prior loans. The Loyalty Discount will remain in effect for the life of the loan.
  3. Automatic Payment Benefit: Borrowers will be eligible to receive a 0.25 percentage point interest rate reduction on their student loans owned by Citizens Bank, N.A. during such time as payments are required to be made and our loan servicer is authorized to automatically deduct payments each month from any bank account the borrower designates. Discount is not available when payments are not due, such as during forbearance. If our loan servicer is unable to successfully withdraw the automatic deductions from the designated account three or more times within any 12-month period, the borrower will no longer be eligible for this discount.
7.39% - 29.99%$1,000 - $50,000Visit Upstart
5.29% - 14.24%1$5,000 - $100,000Visit SoFi
8.00% - 25.00%$5,000 - $35,000Visit Payoff
5.99% - 16.24%2$5,000 - $50,000Visit Citizens
5.99% - 35.89%$1,000 - $40,000Visit LendingClub
5.25% - 14.24%$2,000 - $50,000Visit Earnest
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