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What’s the Difference Between a Personal Loan and a Line of Credit?

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There are two common ways to borrow money: take out a personal loan or open a personal line of credit. With a personal loan, you are provided a lump sum of money and then required to pay fixed monthly payments. On the other hand, with a line of credit, you are provided access to a set amount of money that you can draw on as you need, and pay it back over time with interest. Whichever one you choose is likely to depend on your needs. Here are the main differences between the two:

Personal Loans

Personal Loans give you a fixed sum all at once. They are often used for one-time expenditures such as an unexpected expense or debt consolidation. You pay the loan back over time, with interest, and the payment is most likely the same amount each month. You can apply for a personal loan from a local bank, credit union, finance company or online lender. These loans can have fixed or variable interest rates, and are paid back within a specific time period.

Pros of a Personal Loan

1. Fixed Monthly Payments

Because personal loans have set monthly payments, they allow you to add a consistent line item to your budget. When you consistently make your full payment on time, your debt will be paid in full at the end of the loan term. On the other hand, if you make the minimum payment on a line of credit, you may not achieve the same result.

2. Fixed or Variable Interest Rate

A personal loan may have a fixed or variable interest rate. A fixed rate doesn’t change over the life of the loan but a variable rate is adjusted based on the prime or another index rate. This means that the interest and your payment amount may go up or down over the term of the loan. The adjustment period for a variable rate may also vary depending on your loan contract. The longer the term of the loan, the greater likelihood of variability in rates because rates can fluctuate over time.

3. Lower Interest Rates

A personal loan may offer a lower interest rate than a personal line of credit, because lines of credit are often considered riskier for the lender. However, individual rates often depend on your credit score and how the lender perceives your credit worthiness. Rates on personal loans may vary greatly.

4. Fixed Repayment Period

Usually, there is a fixed repayment period on personal loans that can range from 12 to 60 months, and sometimes longer. When the loan is paid off, you are free of the debt.

Cons of a Personal Loan

1. Loan Fees and Penalties

There may be origination fees, application fees, balance transfer fees, closing costs, annual fees and/or prepayment penalties associated with personal loans.

2. Less Flexibility for Repayment

With a personal loan, you have a set date when your loan payment is due each month. Late fees may be assessed if you do not make your payments on time.

3. Personal Line of Credit

A personal line of credit is similar to a credit card, where although you are approved for a maximum amount of credit, you don’t take it out until you need the funds. You take the money out as needed and then make a minimum monthly payment.

Pros of a Personal Line of Credit

1. Only Borrow What You Need

With a personal line of credit, you only use the approved funds as your needs dictate. For example, you might experience ebbs and flows in your income where you sometimes need extra money to pay bills. Then, when your income increases, you can pay back the credit used.

2. Ongoing Access to Funds

Although there’s a maximum amount you’re allowed to borrow, with a personal line of credit you have access to money whenever you need it. You can continually take out small amounts, pay them back, and borrow again.

3. Lower Interest Rate Than Credit Cards

While interest rates on a personal line of credit may be high, many offer lower rates than credit cards.

Cons of a Personal Line of Credit

1. Higher Interest Rates Than Personal Loans

A personal line of credit often has higher interest rates than a personal loan.

2. Variable Interest Rates

A personal line of credit may have a variable rate, meaning the lender can raise or lower the interest rate as the market interest rates change, at set intervals.

3. Potential to Overspend

Because you have a guaranteed access to money, there is the potential to spend up to your limit even if you don’t need the funds.

To decide which type of loan product is right for you, consider how you plan to use the money (one time vs. an ongoing need), and your financial habits when it comes to responsibly managing and repaying debt.

Do you need a personal loan? Contact Mariner Finance today.

The information provided in this article does not constitute financial advice and is provided for educational purposes only without any express or implied warranty of any kind. This article is not intended as legal, tax, investment, or any other advice, and Mariner Finance does not offer credit repair services. Consider talking with an appropriate qualified professional for specific advice. Blog posts are for informational purposes only.