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Personal loans vs. lines of credit
Choose between getting your funds all at once or withdrawing money as needed.
Personal loans and lines of credit are similar products with different goals. A personal loan delivers a single lump sum with fixed monthly payments, while a line of credit offers ongoing access to a maximum credit line that you repay as needed. The right choice depends on how you plan to use your money.
What's the difference between a loan and a line of credit?
Funds from a personal loan are given as a lump sum while funds from a line of credit are given as needed, similar to a credit card. Both can be used for everyday expenses or emergencies — either in full or in a smaller amount.
Major differences between personal loans and lines of credit include:
- Loan term. Personal loans have set terms of two to seven years. Lines of credit offer flexible draw periods of a few years followed by a repayment period.
- Payments. Expect set monthly payments with most personal loans, while payments on a line of credit vary by how much you draw.
- Fees. Personal loans may have origination fees that increase the cost of borrowing. Lines of credit can come with draw fees and monthly or annual maintenance fees.
- Collateral. Both loan types include both secured and unsecured options. Lines of credit typically being secured with a savings account.
- Interest. Personal loans tend to have fixed rates while lines of credit usually have variable rates.
How personal loans work
Personal loans allow you to borrow money in one lump sum with set interest rates, terms and fees. Fixed monthly payments allow you to budget how much you'll owe each month.
Lenders offer loans from $1,000 to $100,000, though borrowing only what you need can help you avoid paying interest on money you won't use.
When to pick a personal loan
A personal loan is a good option when you have a set expense you need to cover, including:
- Consolidate debt
- Large purchases
- Important events
How personal lines of credit work
A personal line of credit can be more flexible than a personal loan. You can borrow as much as you need up to your credit limit and pay interest only on the amount you use.
Most lines are revolving — meaning after you repay your balance plus interest, you can draw from it again. You can find lines of credit of up to $100,000 or more, but your credit limit depends on the type of collateral the lender requires.
Our guide to personal lines of credit
When to pick a line of credit
You may need to pay a monthly or annual maintenance fee, though you aren't required to use your credit line if you don't need it.
Lines of credit can be good for unpredictable expenses, such as:
- Emergencies
- Home improvements
- Bank overdrafts
Compare personal loans and lines of credit
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Bottom line
Loans and lines of credit are common ways to pay for life's big expenses. The right choice depends on what you need to use the money for and how you want to repay. See who we think are the best personal loans and the best lines of credit.
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Ask an Expert
What is a FLEXIBLE line of credit
Hi Carl,
Thanks for your inquiry
The option to have a revolving line of credit that lets you access your funds as and when you need to. This is an example of a flexible line of credit.
Hope this information helps
Cheers,
Arnold