Personal Loan Versus Line of Credit
Written by True Tamplin, BSc, CEPF®
Updated on January 13, 2021
Personal loan has some differences versus a line of credit.
For example, lines of credit offer continuous funds, whereas a loan provides a lump sum.
Loans also have fixed interest where lines of credit have variable interest.
Lines of credit are ideal for continuous but uncertain costs, and a loan is ideal for single or known costs.
What’s Easier to Get: Personal Loan or Line of Credit?
Personal loans and personal lines of credit are similarly difficult to get.
Both require a healthy credit score, good credit history, and a certain demonstrable income.
The bigger concern is how they should be used; lines of credit are ideal for continuous but uncertain costs, and a loan is ideal for single or known costs.
Personal Line of Credit
- Continuous funds
- Variable interest
- Minimum monthly payment
- Interest charged on money spent
- Ideal for ongoing but uncertain expenses
Loan
- Lump sum
- Fixed interest
- Regular payments of the same amount
- Interest charged on whole amount
- Ideal for single or known expenses
Personal Loan Versus Line of Credit FAQs
Line of Credit (LOC) Definition
What Is a Line of Credit?
A Line of Credit, or LOC, is money lent to an individual or business which the borrower pays interest on.
Depending on the type of LOC, the client either receives a lump sum, or is allowed to “draw against”their line of credit to make purchases, until the credit limit is reached.
Typically lines of credit are given by banks, such as when an individual is issued a credit card.
What Is a Line of Credit and How Does it Work? Revolving vs Non-Revolving
Lines of credit will either remain open, or will close, once the loan has been repaid.
Revolving lines of credit are considered “revolving”because an individual’s credit is replenished when some or all of the outstanding debt has been paid off.
In contrast, a non-revolving line of credit is closed once the account is fully paid off, such as a student loan or mortgage.
Non-revolving credit usually has a lower interest rate.
How does a Line of Credit Work? Secured vs Unsecured
Loans may be unsecured loans, or secured by collateral.
A home equity loan is an example of a collateralized loan, whereby the home is the collateral and will be claimed by the creditor in the event of a default on the loan.
Credit card loans are almost always unsecured, which causes creditors to take on more risk and is why credit card interest rates are generally higher and the borrowing limits are generally lower than secured loans.