At a Glance

If you have a big purchase or project coming up or need to borrow funds for some type of expense, you’ll likely come across personal loans or lines of credit when exploring your financial options. While both give you quick access to funds you can use for just about anything, they have several differences from how funds are distributed, to requirements, to interest rates and repayment options.

Read on to learn more about:

What is a personal loan?

A personal loan is a type of loan you can get from a bank, credit union, or online lender. These loans, which typically have borrowing amounts from $1,000 to $100,000, can be used for just about anything including home renovations, car repairs, paying for a big event or vacation, medical bills, or other unexpected expenses.

Personal loans are typically unsecured, have fixed terms and interest rates, and borrowers with excellent credit can qualify for lower rates than other alternatives. Plus, the application, approval, and funding process are often quicker than other options.

Read More: Everything You Need to Know About Personal Loans | Credello

What is a personal line of credit?

A personal line of credit is like a credit card in that borrowers are given a defined amount of funds that they request, which can be withdrawn at any point. When you draw on the line of credit, the total amount available for borrowing decreases. Then, you can withdraw up to that dollar limit provided by the bank, or you can repay funds you’ve borrowed plus interest.

Once you repay what you borrow, the sum available for borrowing resets. You only pay interest when you borrow the money, not on the total, and you can either repay what you borrow immediately or over a period.

Read More: What is a Line of Credit? | Credello

Similarities between personal loans and lines of credit

Personal loans and lines of credit are similar in that they both require a hard credit inquiry, which can affect your credit score. You must make payments at least monthly, and both accrue interest (though in different ways). Many loans and lines of credit have limits up to $100,000, but both also have a variety of fees you may face.

Personal Loan Line of Credit
Loan Limits Up to $100,000 Up to $100,000
Fees May include fees such as origination fees, application fees, late fees, prepayment penalties May include fees such as annual fees, late fees, and overdraft fees
Repayment Monthly Monthly
Secured or Unsecured Both Both
Interest payments? Yes Yes
Hard credit inquiry Yes Yes

Differences between personal loans and lines of credit

There are also many differences between personal loans and lines of credit. For example, a personal loan is an installment loan, meaning you repay it monthly and have a fixed monthly payment. On the other hand, a line of credit is revolving, meaning like a credit card, you can take out cash as you need it and pay back what you borrow. Interest is also different: Personal loans have fixed rates, meaning they don’t change over time, while lines of credit are variable and can change.

Not all financial institutions offer lines of credit, while loans can be taken out from banks, credit unions, online lenders, and others. Term lengths for loans typically range from 12 to 84 months, while lines of credit have ongoing terms. Finally, when it comes to interest, personal loans start accruing interest right away while lines of credit only accrue after you take out cash or make a purchase, and you only accrue on what you borrow.

Personal Loan Line of Credit
Type of credit Installment Revolving
Type of interest rate Fixed Variable
Minimum credit score requirement 580 670
Term Length 12 to 84 months Ongoing
Funding method Lump-sum Ongoing access until draw period ends
Funding institution Bank, credit union, online lender Bank, 3rd party financial institution
Interest accrual Accrues immediately Accrues only after you purchase something or take out cash

Which option is right for me?

Deciding whether a personal loan or line of credit is right for you depends on your financial needs and personal situation. Start by deciding what your level of need is. How much money do you need to borrow? Are all the funds necessary to have upfront to make a large purchase? Do you have ongoing expenses?

Also think about the monthly payments, interest rates, and terms. How long do you need to repay the funds? Do you want a fixed or variable interest rate? Here is more information to help you decide whether you should choose a personal loan or line of credit:

When should I choose a personal loan?

A personal loan may be best if:

  • You have a large financial need (such as for a large purchase) and need a lump sum of funds up front, or you have a one-time expense.
  • You want fixed interest rates that won’t change over the life of the loan.
  • You need a longer repayment term.
  • You want a predictable monthly payment.
  • You have a poor credit score.
  • You want to consolidate debt.
  • You prefer lower interest rates.

When should I choose a personal line of credit?

A personal line of credit may be best if:

  • You aren’t sure how much you’ll need to borrow.
  • You have ongoing expenses.
  • You only want to pay interest on the portion of the line of credit you use.
  • You don’t mind variable interest rates, meaning they can change throughout the life of the line of credit.
  • You don’t mind a varying monthly payment (due to the variable interest rate).
  • You have an excellent credit score (at least 670), and a low debt-to-income ratio.

Pros and cons of a personal loan

Pros Cons
  • Lower interest rates
  • Excellent credit score required for lowest interest rates
  • No collateral required
  • Fees
  • Fixed interest rates
  • Must repay full loan amount
  • Fixed monthly payments
  • Interest accrued on full loan amount
  • Fewer qualification requirements
  • Can use loan funds for almost any reason

Pros and cons of a personal line of credit

Pros Cons
  • Flexible borrowing options
  • More difficult to qualify
  • Quick access to funds as needed
  • Variable interest rates
  • Interest accrued on what you borrow
  • Fees
  • Flexible repayment options

FAQs

Yes, personal loans and lines of credit have different interest rates. While your actual interest rate will vary depending on factors like your credit score and history, the primary difference is loans have a fixed interest rate and lines of credit are variable. A fixed interest rate means it doesn’t change month-to-month, making your monthly payments and budgeting more predictable. Variable rates change over time, meaning your monthly payments can change and it’s more difficult to budget appropriately.

The best way to manage a loan or line of credit is to make sure you know how much you need to borrow, or budget carefully. Be sure to only borrow what you need, and make the monthly payments on time.

In most cases, a loan has lower qualification requirements. To get a line of credit, you often need a higher credit score and income, and lower debt-to-income ratio compared to a loan. Some loan lenders will work with borrowers who have poor or even no credit.

Personal loans are installments.