Unfortunately, saving money is not always easy. You may try to budget to the best of your ability, but unexpected issues can arise that require you to seek extra money. Two options available to you are a personal loan and a personal line of credit. However, which one of these is the better one for you? To determine that, it’s worth comparing the differences between a personal loan and a personal line of credit.
What Similarities Do the Two Options Share?
One thing that personal loans and lines of credit share in common is that they each give the consumer a chance to get extra money when they really need it. Both options are also available as secured or unsecured borrowing. With the secured route, the individual is required to put up an asset as collateral in the event that they fail to pay back the loan or line of credit. Unsecured personal loans and lines of credit don’t require collateral, which allows the borrower to gain access to funds for a variety of purposes, such as making home improvements, paying off student loans and more.
Another similarity personal loans and personal lines of credit share is found in the application process. To apply for either, the lender will check the borrower’s credit history and verify their income. That is generally to determine whether the applicant is a desirable candidate and to determine whether they would be able to pay back the loan or amount of credit used.
Differences Between Personal Loans and Lines of Credit
A personal loan is essentially a lump sum amount of money that includes a variable interest rate and fixed repayment term. Because the repayment term is fixed, it’s easy to predict how much money you will have to pay back toward the loan on a monthly basis. The amount remains the same. With a personal line of credit, however, you are provided with a maximum amount of money you can use over a specific period of time. You can borrow toward that total amount whenever you need to. When you make payments toward the interest on the line of credit, you only pay based on the amount you borrow.
Personal loans are typically used to pay off credit card debt. They are especially useful when you have amassed a good amount of debt and want to consolidate it. In addition, you can use a personal loan for making home improvements and for a number of unexpected expenses. A personal line of credit, on the other hand, is more appropriate for things that don’t have a clear cost. Sometimes, a person will rely on it as an alternative to drawing funds from their bank account when there is a risk of overdraft.
For some people, it can also be easier getting a line of credit than a personal loan. For instance, the fact that there’s no collateral required for a personal line of credit can make the consumer’s decision easier as to which they prefer. In any case, it’s important to know all the details of each option so you can determine which is better when you need more money fast.