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Compare personal loans vs. lines of credit
Choose between getting your funds all at once or withdrawing them as you need.
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While both personal loans and lines of credit allow you to borrow upwards of $100,000, how you receive your funds and make repayments differs widely. A line of credit may be better suited for ongoing expenses, while a personal loan might be ideal for making a large purchase all at once.
Personal loans vs. lines of credit
| Personal loan | Line of credit | |
|---|---|---|
| How you receive your funds | Receive all your funds up front in one lump sum | Withdraw funds from your line of credit whenever you like, as long as it doesn’t exceed your maximum credit or daily limit |
| Interest rates | Fixed or variable rates charged on the total amount of your loan | Fixed or variable rates, though you’re only charged interest on the amount you withdraw |
| Terms | 1 to 7 years | Draw period from 4 to 10 years |
| Repayments | Fixed monthly repayments over a set number of years | As long as you’re making a minimum required monthly payment, there’s no fixed repayment amount |
| Fees | Origination fee | Monthly or annual service fee |
| Discount rates | Potential rate discount for signing up for autopay | Potential rate discount for signing up for autopay |
6 main differences between personal loans and lines of credit
The main difference between a personal loan and line of credit is how you receive the funds. With a personal loan, you’re given one lump sum that you have to repay — plus interest — over a fixed term. But with a line of credit, you’re given access to a credit account that you can draw from as you wish up to a set limit. You only pay interest on the amount you withdraw.
Here’s a more in-depth look at how personal loans and lines of credit compare:
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. However, lines of credit come with a draw period that typically lasts anywhere from four to 10 years. You can withdraw funds from your account at any time during that period. If it’s a revolving line of credit, the funds you borrow become available again after they’re repaid — plus interest.
2. Repayments
Both involve monthly repayments. However, personal loans have fixed monthly repayments, while lines of credit typically come with a minimum monthly payment based on the previous balance, amount drawn, accruing interest and other factors.
3. Time of disbursement
With personal loans, your lender will disburse your funds up front as soon as you agree on 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 may charge origination fees, while lines of credit usually charge monthly or annual service fees. However, lenders for both personal loans as well as lines of credit may charge a variety of other fees, so read your contract carefully before signing.
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 what you need, when you need it. However, you may have the option to increase your credit limit to meet your specific needs.
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. This can result in lower costs, even if your rates are higher than a personal loan.
Compare your personal loan vs. line of credit options
Updated April 6th, 2020
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Which borrowing option is better suited for you?
Lines of credit are helpful for those needing ongoing sources of funding to be used when they see fit. You won’t be charged on funds you don’t withdraw, making them an excellent option for backup 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 shopping.
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 can be used for a variety of purposes, from planning a wedding to going on vacation. And it can also be appropriate for those looking to consolidate a large amount of debt.
Compare personal loans to even more borrowing options
Bottom line
Both personal loans and lines of credit can give you access to cash to cover a wide variety of expenses. If you like the stability of fixed monthly repayments and need to borrow a large amount of cash all at once, then a personal loan might be right for you. But if you prefer to only borrow what you need — when you need it — and want flexible monthly repayments, then a line of credit may be better suited for your needs.
Learn more about how personal loans work or get the ins and out of lines of credit with our guides.
Frequently asked questions
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