Personal Loan vs Line of Credit: Understanding the Difference

Personal loan vs line of credit: The two are more different than they might seem. Learn the difference between a personal loan and a line of credit here.

A whopping $125.36 billion — that’s how much Americans owed in personal loans by the second quarter of 2018. That equates to 19.5 million unsecured loans, a 6.1 million increase from the number back in 2015.

From a positive perspective, this shows that lenders have become less restrictive. It also signals better borrower confidence, so lenders are accepting more applications. Especially now, with the average U.S. FICO credit score rising to a high 706!

That said, if you’re thinking of borrowing funds, now’s the best time to do so. But before that, you need to decide whether to get a personal loan vs line of credit first. This way, you’ll know which of the two best suits your financial needs.

Ready to learn all about how lines of credit work and what makes personal loans different? Then keep reading, as that’s exactly what you’ll learn in this post!

Funding Methods: The Main Difference Between Personal Loans and Lines of Credit

What distinguishes a personal loan from a line of credit is how you’ll get your “borrowed” funds. Let’s break that down further.

Method of Paying Out a Personal Loan

When you take out a personal loan, you’ll get the entire funds in a lump sum. Meaning, you’ll get access to the money upfront, either through a check or a direct bank deposit. Then, you just have to repay it based on your loan term agreements.

Let’s say that a lender qualifies you for a $2,000 personal loan. If you agree to the loan conditions, you’ll get that entire amount, or sometimes, less the service fees. Either way, you’ll get the entire loan amount in one lump sum payment.

You can then use the funds however you want, be it for emergency purposes or paying off other due bills.

Accessing Funds from a Line of Credit

A line of credit, on the other hand, is a type of revolving credit. This means that you can take out the money only as needed, rather than all at once. The lender will assign a credit limit, which is the maximum allowable “funds” that you can borrow.

For instance, a lender grants you a $2,000 personal credit line. You won’t get the entire money upfront. Instead, the lender will allow you to take out as much as you want, up to the limit, either in small or big increments.

The Repayment Process

Another key difference between a line of credit and a loan is how you pay back your dues. Loans often have a simpler repayment structure compared to credit lines.

Paying Back a Personal Loan

Let’s say that you applied and got qualified for a $2,000 personal loan with Bonsai Finance. The loan is under a 3-month term, which means that the lender will spread your payments over three months. The lender will divide the total amount due (including interest and other fees) by three.

Before you even sign the contract, you’ll know how much your monthly repayment will be. And, so long as you pay back the loan on time and you don’t extend your loan, then you’ll pay the exact same amount every time.

Repayment for a Line of Credit

With personal lines of credit, the amount you pay back can vary widely every month. That’s because lenders usually apply interest only on the amount you’ve already “borrowed”. Your “monthly amount due” will also change based on how much you’ve paid back the month before.

The more you borrow against your line of credit, the bigger your monthly payments will be. Also, the less of those payments you make, the greater the interest payments will be.

Personal Loan vs Line of Credit: Which One Should You Get?

Ultimately, your choice in getting a personal loan vs line of credit depends on how much you need ASAP. Another thing to consider is how much you can afford to pay back every month. And don’t forget that most lines of credit have higher interest rates than personal loans.

But for smaller expenses, a credit line can give you that fall back you need in case you experience a gap in income. For bigger expenses that you need to deal with right away, a personal loan may be a better choice. The important thing is, practice responsible borrowing, whichever of the two you choose!

Ready for more savvy tips to get your finances in check? Then be sure to bookmark our site’s Money section so you can keep checking back more for guides like this!