Personal Loan vs. Line of Credit: How to Choose

Ben Luthi
Personal Loans vs. Line of Credit
Personal Loans vs. Line of Credit

Deciding between a personal loan vs. a line of credit largely depends on what you want to do with the funds, costs associated with securing each type of funding, and other factors. If you’re looking to consolidate high-interest debt, pay for home renovations, or deal with emergency expenses, both personal loans and lines of credit can help. 

As you consider the two options, here’s what you need to know about personal loans and lines of credit, including how they work, how much they cost, and more. 

What is a personal loan? 

A personal loan is an installment loan that offers a one-time disbursement of loan funds, which you’ll then repay over a fixed period of time. Here are some of the important features of personal loans for comparison with personal lines of credit: 

  • Repayment terms: Personal loan terms typically range from one year to seven years. 
  • Interest rates: Personal loans typically come with fixed interest rates, which remain the same throughout the life of the loan. However, some lenders also offer variable rates, which can fluctuate over time along with market benchmark rates. Interest rates typically range between 5% and 36%.  
  • Loan amounts: Depending on the lender and your financial situation, you may be able to apply for a personal loan worth anywhere between $500 and $100,000.  
  • Funding: You’ll receive the loan amount in a lump-sum distribution, typically as a deposit in your bank account.
  • Collateral: Personal loans are mostly unsecured, which means you don’t need to put up collateral to get approved. However, some lenders — most often regional banks and credit unions — may also offer secured personal loans, where you can use a savings account, certificate of deposit, vehicle, or even your home as collateral. 
  • Fees: Some personal loans can come with an upfront origination fee, which the lender deducts from the loan proceeds. However, they typically don’t charge ongoing fees outside of late-payment charges. 

 Personal loans are typically best for one-time expenses, such as debt consolidation, home improvement projects, weddings, vacations, and more. 

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What is a line of credit? 

A line of credit functions differently than an installment loan. Instead of a one-time disbursement, which you’ll pay off over a fixed period of time, a line of credit functions similarly to a credit card, allowing ongoing access to revolving credit with a credit limit. 

Here are some of the important features to keep in mind:  

  • Repayment terms: You’ll get a draw period, during which you can take draws from your credit line and make interest-only payments or minimum payments based on a percentage of your balance. After that, you’ll have a repayment period, during which you’ll make principal-and-interest payments. Terms can range from as little as six months to 15 years.
  • Interest rates: Personal lines of credit often charge variable interest rates, which can change over time based on a market benchmark rate. However, some lenders may offer fixed rates, which stay the same for the life of the credit line. Depending on where you look, interest rates typically range from 9% to 18%. Keep in mind that you’ll only pay interest on the amount you borrow, not the full amount of available credit. 
  • Loan amounts: Depending on the lender and your financial situation, you may be able to apply for a personal line of credit between $1,000 and $100,000.  
  • Funding: Depending on the lender, you may be able to take draws from your line of credit through paper checks, a debit card, an ATM, a bank transfer, or a cash withdrawal at a local branch. 
  • Collateral: Personal lines of credit are mostly unsecured, so you won’t need collateral. But some lenders may offer secured lines of credit, which require an asset like a savings account or certificate of deposit as collateral. 
  • Fees: Personal lines of credit typically don’t charge upfront fees, but you may need to pay an annual fee, which can ultimately cost more than a personal loan origination fee. 

A personal line of credit may be a better option than a personal loan in situations where you want ongoing access to credit. For example, if you have multiple home renovation projects going on, a line of credit that you can use over and over again may be more appealing than applying for multiple loans over the course of your projects. 

Personal line of credit vs. personal loan: Which is easier to get approved for? 

Both personal lines of credit and personal loans require a hard credit check when you apply, which can impact your credit score, albeit temporarily.  

As far as eligibility requirements, personal loans and lines of credit are fairly similar. You typically need good or excellent credit to get approved for a low interest rate, but certain lenders may offer personal loans, lines of credit, or both to borrowers with fair to poor credit. And because most options are unsecured, you don’t need to worry about coming up with an asset for collateral. 

Personal loan vs. line of credit vs. credit card 

Credit cards are another convenient payment method, and in some cases, a credit card may be more attractive than personal loans and lines of credit.  

In particular, you can carry around a credit card wherever you go for point-of-sale and online purchases. And if you can manage to pay off your balance in full each month, you’ll never have to pay interest. 

Even if you need to finance a large purchase over time or consolidate debt, some credit cards offer introductory 0% APR promotions for anywhere between six and 21 months, giving you time to pay down the balance interest-free.  

Many credit cards also offer rewards in the form of sign-up bonuses, as well as ongoing cash back, points, or miles, allowing you to get value back with your everyday spending. 

Similar to lines of credit, you can draw on your credit card’s line of credit over and over again, as long as you don’t exceed the credit limit. Your monthly payment is calculated based on a percentage of your balance.  

Unlike a personal loan or line of credit, credit cards never have a fixed repayment term, and low minimum payments could potentially keep you in debt longer.  

Also, if you have great credit, you can usually get approved for a lower interest rate on a personal loan or line of credit compared to a credit card. 

How to apply for a personal loan or line of credit 

The application process for a personal loan vs. a line of credit is going to look similar, though each lender may have a separate set of guidelines and questions. Before you apply, you’ll want to compare both options to determine which one is better for you. 

Then, you’ll compare at least three to five lenders, so you’ll be able to see their interest rates, fees, repayment terms, and other important details side-by-side. Many lenders allow you to get pre-qualified without a hard credit check, allowing you to see an initial offer for comparison. 

Going through this process can be time-consuming, but Purefy allows you to compare multiple personal loan lenders with just one form. You’ll get real, pre-qualified loan offers based on your actual information and a soft credit pull. 

As you compare, look at every aspect of the loan or line of credit to determine the best offer. Then, submit an official application with that lender. Note that for personal lines of credit, you may need to apply in person or over the phone. Some lenders may also require that you be an existing customer before you can apply. Most personal loan applications can be done online. 

During the application process, you’ll typically need to provide the following information: 

  • Full name 
  • Date of birth 
  • Social Security number 
  • Address 
  • Contact information 
  • Desired loan amount and repayment term 

You may also need to provide a copy of your government-issued photo ID, income documentation, and more. 

After you submit your application, the lender will run a full credit check. If you’re approved, you’ll receive a loan offer, which you can agree to or decline. If you agree, you’ll sign the loan agreement and receive the loan funds or line of credit based on your lender’s timeline. 

The bottom line 

Choosing between a personal loan vs. line of credit is simple for most people. Personal loans are more widely available, offer lower interest rates to borrowers with great credit, and are easier to apply for.  

However, if you prefer the idea of having an open line of credit that you can turn to over the next few years, a line of credit may be a better option. If you have a need for financing, take your time to research and compare each option, along with others like credit cards, home equity loans and lines of credit to determine what is best for you. 

It’s also important to think about the impact a new loan payment and interest charges can have on your budget. Once you’ve decided on the loan type, compare offers from multiple lenders to ensure that you’re getting the best deal.  

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