10/13/2022
As you become more familiar with your personal finances, you should also become familiar with the different banking products available. The main reason is related to learning the precise utility of the tools available.
Therefore, this time we will focus on the differences between personal loans and lines of credit.
What is a line of credit?
Distinguishing the differences between the various financial instruments starts with knowing the details of each.
Regarding the line of credit, we can establish that they work similarly to a credit card. It is usually considered as a revolving credit and its most relevant aspects can be broken down as follows:
- Amount. The amount will always vary depending on the credit score, the entity's policies and other economic factors. Regardless of the maximum limit granted, you can use it all at once or in parts.
- Target audience. Generally, lines of credit are intended for entrepreneurs, small businesses and the self-employed. Their purpose is to give you punctual liquidity to meet some commitment or different payments.
- Time of use. It is usual for these instruments to have a term of one year or more, depending on the conditions of the financial institution. In most cases, you can always renew their availability once you reach the maturity date.
- Interest appliance. A distinctive feature of these products is that they usually charge you interest on the amounts you use at any given time. It is a daily rate on the balance until you repay the money. For the money you don't use, you pay nothing.
- Amount: between $ 7,500 and $ 100,000
- Term: between 4 years and 6 years
- Interest: 6.39%
- APR: 6.39%
- Amount: between $ 3,000 and $ 100,000
- Term: between 1 year and 7 years
- Interest: Ask
- APR: 5.74%
- Amount: between $ 7,000 and $ 50,000
- Term: between 3 years and 5 years
- Interest: 8.42%
- APR: 8.42%
- Amount: between $ 3,500 and $ 100,000
- Term: between 2 years and 5 years
- Interest: 8.19%
- APR: 8.19%
- Amount: between $ 2,500 and $ 40,000
- Term: between 3 years and 7 years
- Interest: 7.99%
- APR: 7.99%
How do personal loans work?
Unlike a line of credit, a personal loan is a one-time sum of money from a bank or lender. These instruments may be secured or unsecured, are subject to an agreement with certain conditions and also have a set term for repaying the money.
The most relevant characteristics of this financing can be described as follows:
- Renewal. A personal loan cannot be made in parts, but you get a full amount. There is no limitation on spending because you already have all the money in your account. To get more funds, you must finish paying and apply again.
- Interest rate. The rates applied to this financing are lower than those assigned to a line of credit because they start charging you from the first day you receive the money. This also depends on the modality, since payday loans include a much higher APR than a conventional product.
- Way of payment. Depending on the term selected and the type of personal loan, the payment of the money can be made on a monthly basis or a single lump sum payment on the due date. For these products, there is also the option of full or partial early repayment, which may or may not include a fee.
- Repayment term. The personal loan has a set time for repayment, except that it cannot be renewed. This period can range from one week to 5 or more years, depending on the lender or the facilities offered.
Differences between a line of credit and a personal loan
As a summary, we analyze the most relevant points to make a distinction between these two types of financing. Based on the details we have pointed out, we can say that a personal loan and a line of credit differ in the following ways:
- Flexibility. We can argue that the line of credit is more versatile because you can withdraw and pay money when you need it, something that is not possible with a personal loan. In the first case it is a renewable-established limit and the second a fixed amount.
- Interest payment. With a personal loan you get lower rates, but you pay a fixed interest from the first day you receive the money until you finish paying it off. On the other hand, the rate for a line of credit is higher, but you pay interest if you use the money.
- Purpose of financing. While the personal loan can be used for different types of projects, the line of credit has a more specific function. In fact, several experts recommend taking advantage of it for cases of lack of liquidity and not as a regular resource because you can get into debt more easily.
Both financial instruments can be useful at specific times if you are well aware of their advantages and disadvantages. For this reason, one option is more focused on satisfying certain business needs and the other is more inclined to resolve personal matters.
Español: Diferencias entre líneas de crédito y préstamos personales