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What’s the difference between a personal loan and a line of credit?

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Photo of a man on couch comparing a loan offer to a line of credit offer

Getting my affairs in order

When you need to borrow money, you probably think of using a credit card or taking out a personal loan. Applying for a line of credit is a third option. What’s the difference between personal loans and lines of credit? When would you want to use one rather than the other? In this article we’ll explore how both options work.

Here’s what we’re going to cover:

  • How are personal loans and lines of credit alike?
  • How are personal loans and lines of credit different?
  • Comparing a line of credit vs. a personal loan: Which one is better for my needs?
  • Oportun: Affordable lending options designed with you in mind

Key takeaways

  • Personal loans and lines of credit are two financing options that allow you to get money when you need it.
  • With a personal loan, you receive a specific sum of money that you pay back in equal installments over time, often monthly or every other week.
  • With a line of credit, you can borrow various amounts of money as you need it, up to an approved limit.
  • The best option for you will depend on your financial situation and how you plan to use the money.

How are personal loans and lines of credit alike?

Personal loans and lines of credit are two ways to borrow money. You can use these funds for a wide range of expenses, including home repairs and medical costs. With either a loan or a line of credit, you must repay what you borrow following a schedule agreed to when you sign the contract, usually in installments. You will also be charged interest, and possibly fees. Both products are available through banks, credit unions, and some state-licensed lenders.

To apply for either a line of credit or a personal loan, you must provide some basic information such as proof of your identity, your address, and your income. The lender will check on your credit history and decide if you qualify to borrow money from them. Each lender will have their own requirements for qualification.

How are personal loans and lines of credit different?

They are different financial products with their own set of rules for qualification, borrowing limits, interest rates, repayment terms, and other factors to consider before choosing to apply for one or the other. Major differences between lines of credit and personal loans include:

Access to funds

How will you get the money you borrow? With a personal loan, you get a lump sum of money at one time. With a line of credit, you can borrow various amounts whenever you want it, up until you reach your credit limit or complete your draw period.

Repayment conditions

You also repay these two financing products differently. On a personal loan, the repayment schedule begins immediately, so your first payment would likely be 2 to 4 weeks after signing the loan document, depending on your terms. A line of credit starts with a draw period when you can withdraw money and only pay interest each month. After this comes the repayment period. During this time, you must repay what you have borrowed, and you can no longer withdraw money. Repayment schedules for both products are determined when you sign the contract.

Dollar amounts

You can usually borrow more money through a line of credit than through a personal loan. However, the lender may require you to have a good credit score or a high income to qualify for a line of credit.

Types of interest

Most personal loans come with fixed interest rates, so that you pay the same amount every month. Lines of credit often charge variable interest. This means that your payments may go up and down, depending on current federal funds rate, which climbed through 2022 and 2023 (your payments likely would have become costlier).

Comparing a line of credit vs. a personal loan: Which one is better for my needs?

How do you decide between a personal loan and a line of credit? The best choice for you will depend on what you feel most comfortable with and what you can afford to pay back.

A personal loan is often a good option when you know how much money you will need. You can apply for a specific loan amount to cover your wedding expenses or a rental deposit, for example.

If you don’t know how much money you’re going to need or when exactly you’ll need it, a personal line of credit may serve you better. Home repairs or remodels, for example, are often paid for as certain milestones are met during the project, and often cost more and take longer than you might expect. A line of credit offers a different type of flexibility and peace of mind in these situations.

Be sure to ask any questions you may have before you sign a lending agreement.

Oportun: Affordable lending options designed with you in mind

Now that you understand the difference between personal loans and lines of credit, you can learn about how Oportun may be able to help you if you’re looking for affordable credit options. Visit our homepage to learn about:

  • Personal loans
  • Secured personal loans
  • Credit cards
  • Saving
  • Investing
  • And more!

Sources

Bankrate. Personal loan vs. personal line of credit: What’s the difference?

Experian. The difference between a personal loan and a line of credit

Forbes Advisor. Personal loan vs. line of credit: Which is better for your wallet?

Forbes Advisor. Federal Funds Rate History 1990 to 2023

NerdWallet. Personal loan vs. line of credit: How to choose

 

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