The primary difference between a personal loan and a line of credit is that a loan is a lump sum of money that must be repaid on a set schedule, whereas a line of credit can be used for borrowing on an ongoing basis.
Personal loans and lines of credit can be useful tools for covering big expenses like a new car or home renovations. Knowing the differences, similarities, and how each works can help you decide which is a better choice for your borrowing needs.
When you need access to extra funds, a personal loan or a personal line of credit can provide flexible financing options. But should you get a lump sum personal loan or a reusable line of credit? Here, I’ll compare the key differences between personal loans and lines of credit to help you determine which is better for your financial situation.
What is a Personal Loan?
A personal loan provides a fixed lump sum of funds that you repay in fixed monthly installments over a set repayment term. Personal loans can be secured or unsecured but unsecured personal loans are more common.
With an unsecured personal loan, you don’t need to put up any collateral The loan amount, interest rate, and repayment terms are set when you take out the loan based on factors like your income, credit score, and debt-to-income ratio.
Personal loans have fixed interest rates, fixed monthly payments, and predictable repayment schedules that stay the same over the life of the loan. They can be a good option if you need a set amount of money for a one-time expense.
Pros of Personal Loans
- Fixed interest rates and payments
- Lump sum of cash upfront
- Wide range of loan amounts and terms
- Good for one-time expenses
- Predictable monthly payments
Cons of Personal Loans
- Interest accrues on full loan amount
- Can’t reborrow funds
- Strict repayment schedule
- High interest for bad credit borrowers
What is a Personal Line of Credit?
A personal line of credit (PLC) provides revolving access to funds that you can continuously borrow against, similar to a credit card. Your line of credit has a set credit limit and an open-ended draw period where you can borrow up to your limit.
PLCs have variable interest rates that fluctuate based on market rates. You only pay interest on the amount you actually borrow. Minimum monthly payments free up your available credit so you can continue using your line.
When the draw period ends, PLCs enter a repayment period where you can no longer borrow and must repay the full balance owed. This repayment structure makes PLCs a flexible way to borrow smaller amounts as needed.
Pros of Personal Lines of Credit
- Revolving credit you can reuse
- Only pay interest on what you borrow
- Flexible access to funds as needed
- Variable rates can decrease
- Draw/repay structure
Cons of Personal Lines of Credit
- Variable interest rates
- Less predictable monthly payments
- May have large lump sum due at end
- Usually requires 680+ credit score
Key Differences Between Personal Loans and Lines of Credit
| Factor | Personal Loan | Personal Line of Credit |
|---|---|---|
| Borrowing structure | Fixed lump sum | Revolving credit limit |
| Interest rate type | Fixed | Variable |
| Monthly payments | Fixed | Fluctuates |
| Credit requirements | 300+ score | 680+ score |
| Interest accrual | On full amount | Only on borrowed amount |
| Ideal uses | One-time expenses | Ongoing flexible spending |
While their structures differ significantly, both personal loans and lines of credit can provide access to financing in a pinch. But which one is the better choice for you?
Choosing Between a Personal Loan and Line of Credit
When deciding whether a personal loan or line of credit is better for your needs, consider these key factors:
1. Your credit score
Your credit score plays a major role in qualifying for either option. Personal loans may approve borrowers with credit scores as low as 300 but interest rates will be sky-high.
For a PLC, you’ll likely need at least a 680 credit score for approval. Those with excellent credit get the best rates on both.
2. How much money you need to borrow
Personal loans and PLCs can both provide similar loan amounts, usually $1,000 to $50,000+. The key difference is when you receive the funds.
With a personal loan, you get the full lump sum upfront to cover a known expense. PLCs give you revolving access to borrow smaller amounts as needed over time.
3. How you plan to use the funds
The way you plan to use the money can help determine which option may be better suited:
-
Personal loans – Great for one-time costs like debt consolidation, home remodeling, medical bills, or major purchases
-
Personal lines of credit – Better for ongoing, flexible borrowing needs like home renovations, living expenses after a medical procedure, or emergency funds
4. Predictable payments vs. flexible borrowing
Personal loans provide predictable payments that stay the same. But you can only borrow once.
PLCs allow you to borrow up to your limit repeatedly. But monthly payments fluctuate based on your outstanding balance and current interest rate.
5. Interest savings opportunities
A personal loan applies interest to the full amount you borrow. But you may qualify for a lower fixed rate than a PLC if you have excellent credit.
A line of credit only charges interest on the amount you actually borrow. But variable rates may increase over time, raising your interest costs.
6. Fees to watch out for
Both options can come with fees like origination fees and late fees. But PLCs may charge extra transaction fees whenever you draw from your line.
Before committing, understand all the fees so they don’t catch you by surprise. Lenders must disclose all rates and fees upfront.
Tips for Choosing the Right Financing Option
- Check your credit score to see where you stand
- Make sure you can afford the monthly payments
- Understand how interest is calculated for each option
- Consider alternatives like credit cards or HELOCs
- Compare multiple lenders to find the best rates
- Choose fixed rates if possible to lock in low rates
- Opt for the smallest loan amount and shortest term you can manage
At the end of the day, there is no one-size-fits-all option. You have to evaluate your unique situation to determine if a predictable personal loan or flexible line of credit better meets your borrowing needs.
How to Apply for a Personal Loan or Line of Credit
Once you decide which option may be best, here are quick steps for getting the financing process started:
Prequalify with Multiple Lenders
Prequalifying lets you see personalized loan offers without a hard credit check. It’s a smart way to compare multiple lenders to find the best loan for your needs.
Check Rates and Terms
Compare interest rates, fees, loan amounts, and repayment terms. Make sure you understand exactly what each lender offers.
Submit a Loan Application
When you’re ready, choose a lender and complete their full application. This triggers a hard credit check that can temporarily lower your score.
Get Approved and Receive Funds
If approved, you’ll receive loan disclosures to accept the offer. Once signed, the lender can deposit the loan funds directly into your bank account in as soon as one business day.
Manage Repayment Responsibly
Once you accept a loan offer, make sure you have a repayment plan to pay off your loan on time and in full. To stay on track:
- Automate payments to avoid late fees
- Pay extra when possible to reduce interest costs
- Avoid borrowing more until your current loan is paid off
- Contact your lender immediately if you anticipate payment issues
Using loans responsibly takes discipline. But it can provide temporary assistance when used intentionally for important financial goals.
Compare Your Personal Loan Options Today
Whether you decide a personal loan or line of credit is a better pick for your situation, the important thing is making an informed choice. Comparing personalized options matched to your credit can help you find financing that works for your budget.
Use an online loan marketplace like LendingTree to easily view multiple loan offers in minutes without affecting your credit score. That way, you can shop smart and confidently choose the best personal loan or line of credit for your needs.
Pros and cons of a personal loan
- Allows you to afford major purchases.
- Many private loans don’t require collateral.
- The fixed payment schedule can help with budgeting.
- May charge high interest rates.
- Some lenders may charge additional fees.
- A missed payment will negatively affect your credit.
What is a line of credit?
A line of credit, also called a personal line of credit, is a form of revolving credit that’s generally available from banks and credit unions.
A line of credit gives you ongoing access to a set amount of money to use as needed. You’re only charged interest on the amount you withdraw from the account. As long as you pay the required minimum monthly payments, your line of credit will remain available and in good standing.
Credit Cards vs Lines of Credit vs Personal Loans – What’s the Difference? Pros and Cons Discussed
FAQ
What is the difference between a personal loan and a personal line of credit?
Is it easier to get a loan or line of credit?
Is it better to take out a personal loan or get a credit card?
Which is better personal loan or personal finance?
What is a personal line of credit?
A personal line of credit is more similar to a credit card than a personal loan. When you apply for a line of credit, the lender approves you for a certain amount, typically up to $100,000 with some lenders offering up to $500,000. Instead of receiving the amount as a lump sum, you can draw up to that amount on an as-needed basis.
What is the difference between a personal loan and a line of credit?
A line of credit provides funds that you can draw from continuously for a certain period, up to a certain limit. Personal loans have fixed interest rates. Personal lines of credit have variable ones. But there’s more to both than that. Learn how a personal loan and a line of credit works so you can make an informed decision.
Are personal loans better than credit cards?
Personal lines of credit are best for projects or purchases that require flexibility. Both options offer lower average rates than credit cards for borrowers with good credit. Repayment terms depend on how much you borrow and the length of your term. Personal loans and personal lines of credit are both meant to cover big expenses or large purchases.
Should I get a personal loan or a credit card?
Personal loans are best for one-time, set expenses. Personal lines of credit are best for projects or purchases that require flexibility. Both options offer lower average rates than credit cards for borrowers with good credit. Repayment terms depend on how much you borrow and the length of your term.