Many consumers looking to borrow money wonder whether they should go with a personal loan or a line of credit. While both lending products have similarities, the way they work is quite different.
A line of credit is seen as a more flexible borrowing solution. It works in a way similar to a credit card, as you have a fixed limit on how much you can borrow. When you get a line of credit, you can draw any amount up to the limit in various ways. The most common one is by writing a check, but many financial institutions also provide you with a credit or debit card that is tied to your line of credit.
As a line of credit is a revolving loan product, you can repay any part that you’ve used and draw on it again. You don’t need to make any payments unless you use your line of credit. The minimum amount that you have to repay and the interest charges associated with the line of credit will vary from one financial institution to the next. A line of credit is a good solution for those seeking a flexible credit product that they can use whenever they need to.
When you get a personal loan, you receive the entire amount of the loan as soon as it’s approved. This also means that you’ll start paying interest on the full amount of the loan as soon as you’ve obtained it. You pay off the loan in installments based on a schedule that was set at the beginning. The term of the loan varies but is typically between one and five years. In most cases, you’ll make the same payment each month, which reduces the amount that you owe the lender until the loan has been paid off in full. In most cases, lenders also allow you to make additional payments or pay off the loan early.