Personal Loan vs. Personal Line of Credit

Credit cards

“Should I get a loan or line of credit?” This is a question many individuals find themselves asking at some point in life. No matter how well-prepared your finances are for emergencies, there may come a time when your savings are not enough to cover what you need. If you’re curious about the differences between a personal loan vs. personal line of credit, you’ve come to the right place. Here, Xpress Cash will examine how these two popular options differ, when they can be advantageous, and how they can affect your credit.

Line of Credit vs. Loan: How Do They Differ?

The main differences between a personal line of credit vs. personal loan are their interest rates, how you receive your funds, and their repayment processes:

  • Interest Rates
    • Personal Loan: The interest rates on personal loans tend to be lower than with personal lines of credit.
    • Personal Line of Credit: Interest rates on personal lines of credit tend to be higher, and are determined based on the borrower’s creditworthiness and personal income.
  • How Your Funds Are Received
    • Personal Loan: When you take out a personal loan, the total amount that you’re borrowing will be given to you in one whole sum.
    • Personal Line of Credit: A personal line of credit sets a credit limit, and you’re allowed to borrow what you need whenever you need it until you hit that limit.
  • Repayment Process
    • Personal Loan: The repayment process for a personal loan is very straightforward. You’ll make payments at a pre-determined amount, on a monthly basis, for a pre-set repayment term.
    • Personal Line of Credit: There is no defined repayment period for a personal line of credit, so it could take longer to pay off than a personal loan. Some lenders might have a system set up to determine monthly payments you’ll make, but most often the repayment process works the same as the minimum payments on a credit card.

Personal Line of Credit vs. Personal Loan: Which Is Right for You?

Still unsure whether a personal loan or personal line of credit better suits your needs? Below, we’ll explore the circumstances where each option can be advantageous:

  • When to Get a Personal Line of Credit
    • Does your personal income vary month-to-month? From independent contractors and freelancers to individuals who work on commission, there are lots of jobs these days that provide good but varied income. Taking out a personal line of credit can provide you with the necessary funds to borrow from when you need them.
    • Are you unsure of exactly how much you need to borrow? Let’s say you’re planning to remodel your home. You might not know exactly how much it will cost in the end, and your costs might be ongoing. This is an instance where a personal line of credit is advantageous because (within your limit) you can pull what you need when you need it.
  • When to Get a Personal Loan
    • If you’re comparing a personal loan vs. line of credit for debt consolidation, medical bills, or a personal project with a fixed-price, a personal loan is advantageous because you already know exactly how much you need to borrow and repay.
    • This enables you to borrow only what you need and to set up a clearer, more structured repayment plan.

Line of Credit vs. Loan: Effects on Your Credit

Finally, you’ll want to consider the effects a line of credit or personal loan can have on your credit.

  • Both options require most lenders to perform a hard credit check, which will cause your credit score to take a temporary hit.
  • If you’re struggling to make the payments for your personal loan or line of credit, you could end up with a missed payment on your credit report, bringing your score down a few points.

Learn More at Xpress Cash!

For additional advice on personal loans vs. personal lines of credit or to explore alternative options, head to Xpress Cash. We offer cash advance services at our numerous Michigan locations, and our knowledgeable staff is always here to help you find the best solution for your unique needs. Contact us to get started today!