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Whether you’re planning to go on a once-in-a-lifetime vacation, renovate your home, plan a wedding or require urgent funds to tide through an emergency, it’s always good to know that you have extra cash to tap on immediately when you need them. With a personal line of credit, you can access funds anytime without having to apply and wait for approval.
Find out more about this type of loan and if it’s right for you.
A line of credit is a form of personal loan that acts like a credit card. Unlike a personal loan, a line of credit has an open-ended loan tenure that allows you to conveniently draw on funds in the form of a revolving line of credit. You pay towards your balance and the accrued interest in monthly instalments, and you can access more credit (to a predetermined limit) as and when you need to. Compared to personal loans, a line of credit typically come with higher and variable interest rates.
A line of credit works much like a credit card, giving you access to a specified credit limit to use at your discretion. The main difference between a credit card and a line of credit is that the credit limit is usually higher on a personal line of credit, while the rates tend to be relatively lower than credit cards. You also won’t need to submit a credit application every time you need to make a withdrawal.
Generally, a line of credit can be more beneficial for someone looking for continued access to an amount of funds, whereas a personal loan may suit someone intending to make a large purchase or other singular expense.
Once you’re approved, the funds are available for you to use when you need them. You are not charged against your entire balance, only on the funds you withdraw. Some line of credit facilities is linked to debit cards, allowing additional flexibility on how you use the funds.
There are a number of key differences between a line of credit and a personal loan that you should consider before choosing which one is more suitable for your needs:
Lines of credit have a maximum credit limit and you’ll only be charged interest on the funds you actually use, as opposed to the entire credit amount.
Repayments are made monthly but there is no fixed “term” for a line of credit. As long as you’re making your minimum monthly repayments, your funds will always be available to you.
If you need access to more funds, your lender may also provide an option to increase the maximum credit limit in line with your specific needs.
A personal loan is a general-purpose loan that provides your funds upfront but has to be repaid in instalments within a predetermined loan term.
Interest is applied to the total amount and calculated for the duration of the loan, regardless if you use the funds or not.
Lenders may offer a discount if you take out a significant loan amount.
Unlike a personal loan in which the whole amount is transferred into your account, a line of credit grants you access to a credit limit, but the funds remain where they are until you decide to use them.
Here are the various features of personal loans and line of credit and how they differ:
| Personal Loans | Line of Credit | |
|---|---|---|
| Features | A general purpose loan that lets you borrow a fixed amount of money over a fixed term, typically at a fixed rate of interest. | A credit line that can be accessed at any time for any type of expense and will remain open as long as you don’t exceed the preset borrowing limit. |
| Loan type | Term loan ranging from one to seven years. | Revolving. |
| Repayment schedule | Fixed monthly payment | Minimum monthly payment on the borrowed amount |
| Loan amount | Typically 4 to 10 times your monthly salary. Borrowing limit for unsecured loan capped at 12 times your monthly salary due to MAS regulations. | Typically 2 to 4 times your monthly salary OR; 10 times if you earn more than S$120,000 p.a. |
| Interest rates | From 3.7% to 5.43% p.a. | From 18.5% to 19.8% p.a. |
| Fees | One time processing fee from 1% to 3% (and usually up to a maximum of $200) | Ongoing annual fees from $80 to $100 p.a. May come with 1-2 years waiver. |
Read more: How a line of credit varies from a personal loan
If you’re considering taking up a personal line of credit, it’s important to compare your options and find the loan that’s right for you. Here are some features to keep in mind when considering the products available:
Take note of the following risks that may come with a line of credit:
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Finder surveyed 1,008 Singaporeans aged 16 and above and found that nearly 1 in 3 have taken out a loan in the past 12 months.
