Personal loan vs line of credit

With so many financing options to choose from, it can get confusing when deciding between two basic borrowing options: personal loans and lines of credit.

Each works a bit differently from the other and has its own advantages and disadvantages. Read our guide to learn how you can make the best decision for your financial situation — and potentially save lots of money in interest and fees.

Line of credit vs loan: 6 differences

1. Loan term. Personal loans have a predetermined term length, usually between one and seven years. They’re paid back in full by the end of that term and the loan closes. Lines of credit don’t come with a set repayment period, and the funds you borrow become available again after they’re repaid (plus interest). It essentially can stay open.
2. Repayments. Both involve monthly repayments. However, personal loans have fixed monthly repayments while lines of credit depend on the previous balance, amount drawn, accruing interest and other factors.
3. Time of disbursement. With personal loans, your lender will disburse your funds upfront as soon as you agree to the loan contract and sign it. With lines of credit, you’re able to withdraw up to your approved limit on an ongoing basis, as long as you’re meeting minimum monthly repayments.
4. Fees. Personal loans usually charge monthly service and application fees, while lines of credit usually charge annual service fees. However, lenders for both personal loans as well as lines of credit may charge a variety of other hidden fees. Make sure you’re aware of all fees for any option you’re considering.
5. Borrowing amounts. With a personal loan, you’re given a lump sum of money that you have to pay back in full. Lines of credit come with a borrowing limit instead — similar to a credit card. This means you can take only what you need, when you need it, but still have access to the full limit.
6. Costs. Being able to borrow only what you need can make lines of credit less expensive. This is because you’re on the hook for less money, and therefore less interest — even if your rates are higher than a personal loan.

Benefits of personal loans and lines of credit

Compare personal loans

Compare lines of credit

Which borrowing option is better suited for you?

Lines of credit are helpful for those who require an ongoing source of funding to be used when they see fit. Since lines of credit are revolving, you won’t be charged on funds you don’t withdraw, making them an excellent option for backup or emergency sources of funding.

Since interest rates could get expensive for lines of credit, they are suited to those looking for flexibility with their credit and an ongoing source of funds for purchases such as paying bills, consolidating short-term debt and home renovations.

Ultimately, a personal loan is suited to someone who wants structured repayments and an initial lump sum paid to them at the beginning of the loan term. A personal loan is appropriate for those looking to make large purchases such as paying for a wedding or vacation using that lump sum. Also, a personal loan can be beneficial for those looking to consolidate a large amount of debt.

Frequently asked questions

• How does my purpose for borrowing money affect my decision between a personal loan and a line of credit?

  If you’re looking to use the funds for one large expense, then you might be better off with a personal loan. If you want an ongoing source of funding, then a line of credit might be more suitable.

• How flexible are lenders with repayments?

  Whichever option you consider, make sure you’re well aware of how much your monthly repayments will be. Some people are tempted to use a line of credit simply because it’s there. If this could be a problem for you, you may want to consider the structured features of personal loans since they offer fixed repayment schedules, giving you consistency and balance.

• How much can I borrow with a personal loan versus a line of credit?

  Personal loans can come in amounts as large as $35,000, sometimes higher, with some lenders offering six-digit loans as well. On the other hand, not many lenders approve small amounts for personal loans but do so for lines of credit. Very large lines of credit are also available, but you’ll need to meet strict eligibility criteria.