Personal Line of Credit vs. Personal Loan: What to Know

If you need to make a large purchase or cover a large expense, you may consider taking out a personal line of credit or a personal loan. Both options can help you access the money you need, but they work a little differently. In this article, we’ll explore how each option works, so you can decide which one may work best for your needs.

What is a personal line of credit, and how does it work?

A personal line of credit is a form of revolving credit that allows you to borrow money up to a set credit limit, repay what you’ve borrowed and borrow again as needed — similar to a credit card. Unlike a credit card, which is typically used for daily purchases, a line of credit is often used for larger long-term expenses, such as a home renovation project.

Once you apply for a personal line of credit and are approved, you may access the funds through a special card or checks. Some lenders may also allow you to transfer funds directly to your checking account.

The lender typically designates a period of time during which you can borrow money from the account. This is called the “draw period” and can last several years.

Minimum monthly payments will be due during the draw period, and you’ll pay interest on the amount you borrowed. Since this type of credit is revolving, the minimum payment can change from month to month, depending on how much of the line you’ve drawn. If you access more of your credit line, the minimum payment could get higher. If the line of credit has a variable annual percentage rate (APR), then the amount of interest you’re charged can change as well — just like the APR for a credit card can change.

Once the draw period ends, you’ll enter a “repayment period,” when you have a set amount of time to pay off any remaining balance you owe.

Fees for a personal line of credit can vary by lender and may include an annual fee as well as a transaction fee every time you draw money. Lenders may also charge late fees for missed payments.¹

What is a personal loan, and how does it work?

A personal loan is a specific amount of money you borrow from a lender, credit union or bank and repay in predictable monthly installments, with interest, over a set period of time. Personal loans typically have fixed interest rates, meaning your payment amount stays the same as long as you make your payments on time. And, with a set payoff date, you’ll be able to make a clear plan for repayment.

A personal loan may come with an origination fee, a one-time, upfront fee a lender charges to process an application and set up the loan. If you miss a payment, you may also be charged a late fee.

How to decide between a line of credit or a personal loan

The best option comes down to your financial needs. Each borrower’s financial situation is different, but here are three questions everyone should consider when choosing between a personal loan or a line of credit:

Why do you need to borrow money?

Personal lines of credit and personal loans work best for different situations. Understanding your needs before borrowing can help you choose the form of credit that best fits your situation.

• Line of credit: There are many situations where it could be helpful to have an open line of credit to use as needed. For example, homeowners wanting to make renovations may choose a line of credit if they aren't quite sure how much the project will cost.
• Personal loan: A personal loan may make sense for one-time purchases and situations when you know how much money you'll need. Consolidating debt, paying for auto repairs and making home improvements are a few of the reasons many borrowers choose a personal loan.

How much money do you need, and when do you need it?

Because personal loans and personal lines of credit allow you to borrow money differently, it’s wise to understand how you plan to use the money before you borrow.

• Line of credit: If you're unsure of how much or how little money you’ll need, a line of credit allows you to access funds as needed. Instead of receiving a lump-sum check, you’ll be approved for a credit line, which you can borrow against as needed.
• Personal loan: A personal loan is usually the better choice if you need a lump sum of money right away. Most personal loans are paid out in a one-time disbursement and delivered via paper check, direct deposit to your bank account or to your debit card. At OneMain, you may receive your personal loan funds in as little as one day in some cases.

How would you prefer to pay the money back?

Personal loans and personal lines of credit have different repayment plans. Thinking about how each type of repayment plan will affect your finances may help you choose the right option for you.

• Line of credit: With a line of credit, your payments can vary, depending on your outstanding balance, whether the interest rate has changed and whether you choose to pay more than the monthly minimum during the draw period or wait until the repayment period to make substantial payments. In general, you'll pay less interest over time if you pay your outstanding balance in full and on time each month.
• Personal loan: The predictability of a fixed payment amount and clear payoff schedule makes a personal loan an attractive option for those looking for an easy way to manage a monthly budget. When you pay on time, every time, you’ll always know exactly how much your payments will be each month, and how long it will take to pay your loan off.

---

---

The choice is yours

When it comes to borrowing money, there’s no “one solution fits all.” The right choice depends on your financial needs, your credit score and many other factors. As you narrow down your options, consider how each one will affect your budget and choose what’s best for you.

This article has been updated from its original posting on July 24, 2019. Matt Diehl, Kia Jackson, and Kim Gallagher contributed to this post.

This article is for general education and informational purposes, without any express or implied warranty of any kind, including warranties of accuracy, completeness, or fitness for any purpose and is not intended to be and does not constitute financial, legal, tax, or any other advice. Parties (other than sponsored partners of OneMain Financial (OMF)) referenced in the article are not sponsors of, do not endorse, and are not otherwise affiliated with OMF.

Source

1 https://www.experian.com/blogs/ask-experian/personal-loan-vs-line-of-credit/