Personal Loans Vs. Lines of Credit Explained
Thinking about a big home-remodeling project? Or maybe you're dreaming of hitting the water on that beautiful boat you've had your eye on. The next thing to consider is how you're going to pay for it.
Should you take out a loan? Or could a line of credit be a better idea? Before you decide, we'll take a closer look at personal loans vs. lines of credit, so you can determine the fastest way to meet your goals, while also making the best financial decision for you.
March 3, 2021 in Learn
What is a personal loan?
A personal loan is for an approved fixed amount of money that is loaned to you in a lump sum. If it is approved as an unsecured loan, you are not required to put up any specific collateral, like your house or car, to be approved. You generally repay the principal and interest over a fixed period of time – either at a fixed or variable interest rate. Personal loans are a great lending option if there is a big purchase ahead, such as paying for education expenses.
One example of this is American Express® Personal Loans, which are offered to eligible pre-approved Cardmembers at a fixed interest rate. If approved, you could receive the funds directly in your bank account within 1-3 business days. You would then follow a set payment schedule with predetermined monthly payments. Personal loans provide you with structured monthly payments and a fixed term such as 12, 24 or 36 months.
What is a line of credit?
A line of credit is a lending option that allows you to borrow from it as needed, but there is an assigned limit on the amount of funds available. You only pay interest on the money that you borrow, and you can borrow up to the available credit limit. As you pay back the money, the line of credit is replenished. You might be able to qualify for an unsecured personal line of credit, much like an unsecured personal loan which does not require any collateral. If not, you will be required to secure the funds by putting up collateral, like your home or vehicle, for example. With lines of credit, interest rates generally vary. You can pay your minimum payment monthly to revolve on your balance, however you would continue to accrue interest. A Line of Credit can be a flexible option if you have unforeseen expenses and allows you to make the minimum payment where there is no fixed term.
When should I choose a personal loan vs. line of credit?
Personal loans are best for fixed, one-time expenditures – when you know what the exact cost will be. Here are examples of one-time costs where using personal loans often makes the most sense:
When should I choose a line of credit vs. personal loan?
When you need more flexibility, a line of credit is probably the way to go. For example, if you have:
- An ongoing remodeling project with costs that are ever-changing
- Ongoing business overhead costs
No matter what method you choose – a personal loan or a line of credit – be sure to do your homework. There's an array of lending institutions offering these options, and it may be difficult to choose the right one for you. Be sure to compare things like interest rates, borrowing limits and repayment terms, which can all vary greatly from lender to lender. And, most importantly, read all the fine print related to interest rates and fees so that you're not caught off guard.