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.
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.
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 2019!
|Lender||APR Range||Loan Amount|
|1 Includes AutoPay discount. Important Disclosures for SoFi.
2 Includes AutoPay discount. Important Disclosures for Payoff.
3 Important Disclosures for FreedomPlus.
4 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
5 Important Disclosures for LendingPoint.
6 Important Disclosures for LendingClub.
All loans made by WebBank, Member FDIC. Your actual rate depends upon credit score, loan amount, loan term, and credit usage & history. The APR ranges from 6.95% to 35.89%*. The origination fee ranges from 1% to 6% of the original principal balance and is deducted from your loan proceeds. For example, you could receive a loan of $6,000 with an interest rate of 7.99% and a 5.00% origination fee of $300 for an APR of 11.51%. In this example, you will receive $5,700 and will make 36 monthly payments of $187.99. The total amount repayable will be $6,767.64. Your APR will be determined based on your credit at the time of application. The average origination fee is 5.49% as of Q1 2017. In Georgia, the minimum loan amount is $3,025. In Massachusetts, the minimum loan amount is $6,025 if your APR is greater than 12%. There is no down payment and there is never a prepayment penalty. Closing of your loan is contingent upon your agreement of all the required agreements and disclosures on the www.lendingclub.com website. All loans via LendingClub have a minimum repayment term of 36 months. Borrower must be a U.S. citizen, permanent resident or be in the United States on a valid long term visa and at least 18 years old. Valid bank account and Social Security number are required. Equal Housing Lender. All loans are subject to credit approval. LendingClub’s physical address is: LendingClub, 71 Stevenson Street, Suite 1000, San Francisco, CA 94105.
†Per reviews collected and authenticated by Bazaarvoice in compliance with the Bazaarvoice Authentication Requirements, supported by anti-fraud technology and human analysis. All reviews can be reviewed at reviews.lendingclub.com
**Based on approximately 60% of borrowers who received offers through LendingClub’s marketing partners between January 1, 2018 to July 20,2018. The time it will take to fund your loan may vary.
7 Important Disclosures for Earnest.
8 Important Disclosures for Avant.
* The actual rate and loan amount that a customer qualifies for may vary based on credit determination and other factors. Funds are generally deposited via ACH for delivery next business day if approved by 4:30pm CT Monday-Friday. Avant branded credit products are issued by WebBank, member FDIC.
** Example: A $5,700 loan with an administration fee of 4.75% and an amount financed of $5,429.25, repayable in 36 monthly installments, would have an APR of 29.95% and monthly payments of $230.33
* Important Disclosures for Upgrade Bank.
Upgrade Bank Disclosures
** Accept your loan offer and your funds will be sent to your bank via ACH within one (1) business day of clearing necessary verifications. Availability of the funds is dependent on how quickly your bank processes this transaction. From the time of approval, funds should be available within four (4) business days.
|5.75% – 16.24%1||$5,000 - $100,000|
|7.46% – 35.99%||$1,000 - $50,000|
|7.99% – 35.89%*||$1,000 - $50,000|
|5.99% – 24.99%2||$5,000 - $35,000|
|5.99% – 29.99%3||$7,500 - $40,000|
|6.79% – 20.89%4||$5,000 - $50,000|
|9.99% – 35.99%5||$2,000 - $25,000|
|6.95% – 35.89%6||$1,000 - $40,000|
|6.99% – 18.24%7||$5,000 - $75,000|
|9.95% – 35.99%8||$2,000 - $35,000|