Differences Between Personal Loans And A Line Of Credit
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Personal Loans and a Line of Credit
Two popular types of loans are personal loans and a line of credit, but many people do not know the difference between the two. Below, we will discuss them both in more detail along with the benefits of each. Education is always the first step toward good decisions.
Personal Loans
A personal loan is a specific amount of money borrowed at one time. The full amount plus interest has to be paid off before any more can be borrowed. For instance, you can borrow $500 from a lender and pay it back along with interest. If you do so in a timely matter, you can most likely borrow that amount again.
Line of Credit
A line of credit is a revolving loan. You are approved up to a certain amount and can continually borrow up to that amount without reapplying as long as you are not behind on payments. For example, my mother’s bank approved her for a $5,000 line of credit. When she needs it, she simply goes to the bank teller and tells them how much she needs. If she only borrowed $1,000 the first time, she can still go back in to borrow the remaining $4,000 as long as she is on time with her payment on the $1,000 loan.
Similarities and Differences in Personal Loans and a Line of Credit
Two very obvious similarities between personal loans and a line of credit are that they are debt and reported on your credit. The differences between personal loans and a line of credit are equally as simple to understand. First, the interest may differ, but this depends on the lender. Then there are the differences in how you borrow and how soon you can borrow more.
Let’s take my mother’s line of credit as an example again. Remember, the first time she borrowed, she only took $1,000 of the available $5,000 leaving her $4,000 more available to her. If she took that $1,000 out to put a down payment on a car but found she needed another $2,000 to get the car she wants, she can simply go back to the bank teller and say she needs $2,000 more from her line of credit.
If we use the same example with a personal loan, you will see a large difference. Let’s say she borrowed the $1,000 for the down payment as a personal loan but then found she needed $2,000 more for the car she wanted. She would then have to choose between three unfavorable options. She would have to either wait until she paid off the $1,000 loan to borrow more from that lender, shop personal loans from a different lender, or find a different car.
Should I Apply for Personal Loans or a Line of Credit?
There are advantages to both of these types of credit. A personal loan limits the amount you can borrow at once. If you are not responsible with money, a revolving line of credit may be too tempting and put you in a deep hole. At the same time, if you are responsible, a revolving line of credit can improve your credit score tremendously since you continually borrow and pay it back.
Also, a line of credit decreases the number of hits on your credit report. In short, you should apply for the type of loan that best suits your responsibility and your needs.
Conclusion
If you decide to take out a loan, be sure you shop personal loans. Do not just pick the first one available. Interest rates and approval odds often differ from one lender to the next. Visit Loanry.com when shopping for quick cash loans. They specialize in helping you find the right lender for your needs.