Personal Line Of Credit Vs Personal Loan

Personal Loan

Lending is very popular today. It is difficult to find an adult who has not used this service at least once. Financial companies provide loans for specific purposes, such as buying an apartment, vacation, or wedding event. Since debt can be repaid in installments, many people have the opportunity to solve pressing problems quickly and efficiently.

The personal line of credit has become widespread in the last few years. This type of lending involves the possibility of a phased use of credit funds within the established limit. Personal loans are no less popular nowadays.

Such loans are usually provided to an individual by a bank or other financial institution. It is issued with minimal documentation. Borrowed funds can be used for any legal purposes. But it is important to strictly comply with the terms of the loan agreement and make regular monthly payments during the repayment period.

Find out more about the personal line of credit and the personal loan in this article and decide which option suits you best.

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Personal Loan vs. Line of Credit: Key Differences

The main difference between a personal line of credit and a personal loan is that a personal line of credit allows you to receive cash in installments, while a personal loan is provided in one payment. In addition, these types of loans differ in loan amounts, interest rates, fees, minimum required credit score, and repayment terms. Review the table of key differences.

Personal Loan Line of Credit
Type of credit Installment Revolving
Disbursement One-time arrangement Open-ended arrangement
Purpose Debt consolidation payment, emergency expenses, large purchases, etc. Refinancing car or student loan, covering major expenses, home repairs, emergency medical procedures, etc.
Loan limits Up to 100,000 dollars Up to 100,000 dollars with some up to 500,000 dollars
Interest rates Fixed rates (5.74%-35.99%) Variable rates
Fees Origination fee, application fee, late fee, and prepayment penalties Annual fee, late fee, and overdraft fee
Minimum required credit score 580 670
Repayment terms From 12 to 60 months or sometimes longer Vary depending on the loan amount and can be up to 5, 10, 15, or 20 years

Let’s Consider Personal Loans

Let’s consider personal loans in more detail so that you can understand whether it is worth your attention. You probably already understood that such a loan is money that a financial institution lends to an individual for a certain period for personal needs.

Personal loans are divided into:

1. Secured (car loans, mortgages);

2. Unsecured (cash provided by financial companies).

They can also be long-term or short-term. Most personal loans are provided by banks and lenders online. Before taking out a loan, pay attention to the conditions of the loan agreement, compare the offers of different institutions, and choose the most profitable option for yourself.

It is also important to consider the term of loans: the longer the term, the higher the overpayment. Read the paragraphs below about who should choose personal loans and when is the best time to do so. Find out also the main pros and cons of this type of lending.

Who Should Choose Personal Loans?

Requirements for applicants vary from state to state in the US. The laws of each state determine the permissions and restrictions on using such services. However, there are standard requirements that apply throughout the US. They include the following:

Citizenship or temporary residence in the United States;

  • Age 18+;
  • Proof of identity (a state-issued ID card, passport, or driver’s license);
  • Proof of address (it is necessary to provide information about the place of residence);
  • Good credit score (minimum required is 670);
  • Regular monthly income (approximately $1,000);
  • Debt-to-income ratio no more than 35%, etc.

Any person who meets the requirements of the best lender and provides all the necessary documents can receive money on a bank card. These can be pensioners, students, the unemployed, people with disabilities, self-employed individuals, etc.

As for the purposes of personal lending, they can be different. Funds can be obtained for debt consolidation, expensive purchases, home renovations, car purchases, emergency expenses, and any other legal payment.

When to Choose a Personal Loan?

It is recommended to use personal loans if you are sure that this type of loan is best suited for solving your pressing problem. For example, personal loans are an excellent option for debt consolidation. You can get one loan at a favorable interest rate to pay off many other debts.

It is also advisable to borrow the required amount of cash advance if you want to make home repairs. Maybe, you are planning some important event in your life, such as a wedding. Borrowed funds will help you cover all expenses.

Pay attention that personal loans are also great for improving your credit score. If you have a low rating, you can demonstrate your responsibility in fulfilling the conditions of the loan agreement (making payments without delay) and increase it gradually.

As you can see, there can be different situations when it is worth choosing a personal loan. The main thing is to make sure that your choice is correct and provides you with benefits.

Pros and Cons of Personal Loans

Like any other type of lending, personal loans have some advantages and disadvantages. The main pros include:

  • Large selection of offers from different institutions. Finding a lender is not difficult today. You can do this without even leaving your home. Many companies offer their services online, and all you need to do is fill out a simple application and wait for the approval.The best creditors in the US are Upstart, Upgrade, SoFi, LightStream, Marcus, LendingPoint, Bad Credit Loans, etc. By contacting one of the companies, you will certainly be able to borrow money on favorable conditions at any necessary moment;
  • Relatively loyal requirements for borrowers. To receive cash at favorable interest rates, you must be 18 years of age or older, live in one of the US states, and have a regular monthly income. Lenders can also ask for proof of identity and address, valid bank card details, and credit history report;
  • Possibility of early repayment without penalties. Most companies allow you to repay the loan ahead of schedule. Penalties are not charged for this.

The cons of personal loans are as follows:

  • The lending company is not always ready to approve the amount you need. Clients often receive approval but for a smaller amount than requested. This is mainly due to the applicant’s poor credit score and incomplete compliance with the established requirements;
  • The interest rate is determined individually for each client and may be higher than you would like to receive. The minimum rate is usually 5.74%, and the maximum rate can reach 35.99%;
  • Additional commissions. When applying for personal loans, you should carefully read the agreement. It often contains information about the additional fees. For example, banks often persuade the client to take out health or life insurance, but after the successful repayment of the loan, the cash advance is not returned.

Let’s Consider Personal Lines of Credit

A personal line of credit is a product that allows you to optimize the processing of classic loans. This loan provides a certain amount of cash to the borrower, which can be used within the established limit at any moment.

So, there is no need to apply and confirm your solvency every time you need borrowed assets. They can be taken from the already approved credit limit.

Interest rates are applied only to the spent part of the cash. The part of the credit spent is called a tranche. The return period is set depending on the conditions of the open program. In this case, there is often no clear schedule of payments. As a rule, the borrower can repay the debt at a convenient pace but no later than the specified period.

Let`s consider who should use personal lines of credit and their advantages and disadvantages.

Who Should Choose Personal Lines of Credit?

Personal lines of credit are great for both legal entities and individuals. It is beneficial for legal entities to obtain such credit for investing in business development. Such lending is useful as a backup source of assets because it is impossible to predict all upcoming expenses and financial risks in long-term planning.

Personal lines of credit are freely available to millions of individuals. The service is widely distributed today. To apply, you must submit an application online or at the service office of a lending institution.

Based on the results of the consideration, the lender will agree on the amount of the limit, the grace period, the interest rate, and other personal conditions. After signing the agreement and activating the card, you can use the limit. But certain rules must be followed. The main rule is the timely return of cash.

When to Choose Personal Line of Credit?

A personal line of credit is the choice of many people who need money. The purposes of use are very diverse: business development, refinancing a car or student loan, covering major expenses, home repairs, emergency medical procedures, etc.

Thus, if you need cash to cover some expenses, a personal line of credit can be an excellent choice. You can apply anytime if you have a credit score of 670 or higher, a credit history without defaults, and a reliable monthly income.

Pros and Cons of Personal Lines of Credit

A personal line of credit has several important pros and cons. The main pros are the following:

  • Loan amount. The borrower determines the amount he is willing to spend from the personal credit limit;
  • Unique interest accrual system. The interest is calculated on the actually spent part of the cash until it is returned;
  • Small interest rates. The interest rates of personal lines of credit are often more favorable than personal loans rate;
  • Saving time. Cash is available around the clock. There is no need to submit a new application each time.

Cons of using a personal line of credit:

  • The approval of legal entities’ applications often takes a long time. Before approving a credit for a business, the lending institution carefully checks the reliability of the client and the prospects for the project’s development;
  • The money limit can be blocked. If the borrower violates the conditions of the agreement, the credit company will likely block the credit limit;
  • Non-use penalties may apply. Many companies penalize borrowers for not using open credits.

Summing Up

Considering all of the above, it is recommended to choose the type of lending depending on your goals. Personal lending is best for large one-time expenses and investments. This is purchasing a car, equipment, debt consolidation, etc.

Pay attention that a personal line of credit is considered a more flexible lending option. It is great for small recurring expenses and projects where the final cost is hard to predict in advance. Such a loan is suitable, for example, for business development or home renovation, as interest is charged only on the amount used.

Define a clear purpose for borrowing cash, and you will certainly choose the best option for yourself.

FAQ

How to choose between personal line of credit and personal loan?

To choose between a personal line of credit and a personal loan, first, determine the purpose for which you need to borrow money. If this is a large one-time expense, personal credit will be a good choice. If you need periodic payments, it is better to prefer a personal line of credit.

What is more expensive: personal line of credit and personal loan?

Personal lines of credit are usually more expensive. This is because they involve greater risk on the part of the lending company

What is easier to get: personal line of credit and personal loan?

Lenders usually have stricter requirements for a personal line of credit applicants than personal loan applicants. For example, the minimum credit score required to apply for a line of credit is 670, while for a personal credit, it is 580. Therefore, it is easier to borrow a personal loan.

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