Personal Line of Credit vs. Personal Loan: Which Is The Best Option For You

Camino Financial05 Jan 2024
Personal Line of Credit vs. Personal Loan: Which Is The Best Option For You

A personal line of credit vs. personal loan; What are the differences, and which is best between the two? Although there are some similarities between personal lines of credit (PLC) and loans, they also have distinct differences.

A personal line of credit allows you to borrow money without putting down any collateral; in contrast, a personal loan requires that borrowers put up certain assets as security for their borrowing requests. In this article, we explore all the characteristics of each one and the differences between them and thus help you make the best decision.

What is a Personal Loan?

Personal loans are a financial product in which the financial institution borrows money to use on whatever you want.

Unlike a line of credit, this option will give you a specific amount of money with specific personal loan terms, interest rates, and the repayment period. This gives you more certainty regarding the repayment period, although it doesn’t provide you the same flexibility when you take the money. You can find both secured and unsecured personal loans.
#CaminoTip The Ultimate Guide to Personal Loans for Bad Credit.

What is a Personal Line of Credit?

A personal Line Of Credit (or LOC) is one option for obtaining financing that you can use to fund various projects or items. It's like a credit card. The financial institution will approve a credit limit, and you can use the money if you do not exceed the limit. Many businesses use a line of credit they can tap into when needed, but it's not often the first financing option for personal use. In fact, most of the time, people only think that a personal line of credit is available through their home—also known as a home equity line of credit. But, you can get a line of credit even directly through a financial institution without having home equity. You probably have more questions about understanding the difference between a personal line of credit and a personal loan, like how a line of credit works or how expensive it is. Keep reading to find out.

Difference Between a Line of Credit and a Personal Loan

Features Line of Credit Personal Loan
Interest rate Variable Fixed
Type of Credit Revolving Installment
Amount Ranges 1.000$-100.000$ 1.000$-100.000$
Loan term length 24 to 60 months  6- 60 months
Credit score needed 670 or more Minimum 610 to 640
Types of fees Application fees, annual fees, exceeding credit limit fee Application fee, origination fee, or a prepayment penalty
Types Unsecured and secured Unsecured and secured
What It's Best For Short-term needs such as debt consolidation, home improvement, or unexpected expenses. Better for ongoing or recurrent expenses.

Other differences between these two options

How Much Money you Receive and How

You might think that a personal line of credit offers more flexibility since you can draw down as much money as you need when you need it. The flip side is that you are limited by what you can do with a line of credit. The bank will limit how much you can draw down at any time with a personal line of credit. This would severely limit what you could do with that line of credit, even if you have a high overall limit. So, the main difference here is that a personal loan gives you much more freedom. You’ll receive all that money upfront, no matter what amount the lender

Repaying the Financial Product

A line of credit because it is a revolving line; your outstanding balance will carry over from one month to the next. Yes, your minimum monthly payments will likely be lower with a line of credit, but there is often no end in sight times. In other words, you could just pay the minimum monthly payment and never find yourself out of that debt. By contrast, with a personal loan, you will make the set monthly payments that allow you to pay off the loan reasonably.

Personal Loans and Personal Line of Credit Pros and Cons

Pros & Cons of Personal Loans

When weighing your decision to consider personal loan financing, it’s a good idea to know the pros.
  • Easy to qualify for
  • Get all the money in one lump sum upfront
  • A defined repayment period and fixed interest rate (typically)
On the other hand, here are the cons of this option:
  • You can’t take a little bit of money at a time as you need it
  • Can have longer repayment periods
#CaminoTip How to Refinance a Personal Loan: Step-By-Step

Pros & Cons of a Line of Credit

Just like personal loans, there are positives and negatives to getting a line of credit. The first things you need to know are
  • Can draw down money as you need it
  • Only have to pay back what you used
However, there are some cons you need to consider to evaluate this option
  • It can have a cap on how much you can draw down at one time
  • Variable interest rates
  • A shorter repayment window may make for higher monthly payments

Requirements of Each Option

The steps for getting a personal loan are similar to getting a line of credit. In many cases, qualifying for a personal loan will be a little easier. To get a personal loan, follow these simple steps:
  1. Compare lenders and choose the best option
  2. Complete their online application or one in person at a branch (here's how to complete a personal loan application)
  3. Provide supporting documentation, if needed
  4. Connect your bank account to your personal loan account for direct funds transfers
On the other hand, getting a personal line of credit is a relatively straightforward process. Depending on the lender you choose, you may need additional documentation. However, in all cases, they will need your basic personal and financial information, including full name, date of birth, address, Social Security number (or ITIN, if they accept it), and sources of income. You may also need to provide proof of your income or evidence of collateral if it's a secured line of credit. To get a personal line of credit, follow these simple steps:
  1. Compare lenders and choose the best option
  2. Fill out the application on their website (if available) or in person at a branch
  3. Provide the needed documentation
  4. Once approved, connect your bank account with your line of credit account so the lender can transfer the funds directly to you (and so you can repay the line of credit as well).

Personal Loan vs Line of Credit Interest Rates

Personal loan interest rates can range from 5% to 40%, but they vary depending on several factors. Primarily your credit history and credit score. Generally speaking, if you have an excellent credit score ranging from 720 to 850 and solid credit history, you could qualify for a fixed interest rate between 9% and 13%. If you have a worse credit score and history, your interest payments will naturally be higher. For some people with poor credit, interest rates on a personal loan could be as high as 20% or a little more.
The higher your score and better your history, the lower your interest rate will be generally—and vice versa.
Otherwise, a bank will charge you on a personal line of credit interest between 9% and 18%. But that can vary. Line of credit interest rates can vary greatly, depending on many factors. However, to be safer, there are options such as calculators to assess the viability of this type of credit. First, they will depend on your personal credit history and your credit score. Second, the interest rate will depend on the bank or credit union where you get the line of credit. The interest rate on most personal lines of credit is variable. This means that if the Prime Rate changes, the interest rate will change.

Personal Loan vs Line of Credit Limits

Your personal loan credit limit will again vary depending on your financial factors and the lender you are dealing with. Some lenders will offer personal loans of as little as $1,000 and as high as $100,000 for well-qualified borrowers. In most cases, a personal loan credit limit averages around $5,000. The nice part about personal loans is their limits often go much higher than other forms of personal credit. In contrast, the limit on a personal line of credit can vary greatly. The amount of credit you will receive depends on several factors, including your credit report and score, the financial institution, and the overall debt-to-income ratio. Financial institutions will analyze all of these factors—and potentially more—when they decide how much of a credit line to extend to you. Some financial institutions will offer personal lines of credit of as little as $1,000, and some may even provide a credit limit of as much as $100,000—though most don't go that high.

How does a Personal Loan Work?

When comparing a personal line of credit vs. personal loan, you need to understand how most personal loans work.

Application and Funding

First, look at the best personal loan options available. Then complete a personal loan application with the selected financial institution, which will examine your overall financial picture before making a decision.

They will look at your credit history and credit score, debt-to-income ratio, current employment situation, and history, among other factors. Then, the financial institution will approve you for a certain amount.

Using Funds and Paying

The bank will have a set repayment plan with a fixed interest rate as part of the approval process. Some lenders will provide flexibility in choosing the repayment plan that would work for you. For example, you may be able to choose a longer repayment period in exchange for a higher interest rate or vice versa. You will have fixed monthly payments and an end date for the loan repayment.

The Cash you Receive

Once approved, the bank will give you the amount at once, in a lump sum. Most financial institutions will deposit all that money into your bank account so that you can use it however you want and whenever you want. Again, since you get all the money upfront from a personal loan, the bank will charge interest and make monthly payments based on the loan amount.

How does a Line of Credit Work?

If you ask yourself, "what is a personal line of credit?" you need to understand how one works.

Application and Funding

This option works similarly to a credit card. First to apply for a personal line of credit, and then you'll need to fill out an application. This will include information about your income, debts, and other factors.

For many lenders, you can apply for a line of credit online, which can be an advantage in making the process faster. Then, the lender will review it and decide based on their criteria. If they approve your request, they will extend you a certain amount of money you can use when and how you want to. Once approved, the financial institution will notify you of how much your total line of credit is. You’ll then be able to tap into any of the unused funds from the line of credit.

Using Funds and Paying

This is one of the top things that separate a personal line of credit from a personal loan. When you use some of the funds, the bank will deduct it from the total amount of your credit line. So, for example, if your total credit line is $5,000 and you use $1,000, you will have $4,000 remaining on your credit line to use. Like a credit card, the bank will only charge interest on the amount of money you actually use from your credit line. You'll have to repay your personal LOC monthly, with a set minimum monthly payment. Whatever portion of the balance you don't pay off will roll over and stay on your total outstanding balance. Personal lines of credit typically have repayment periods of as little as six months or five years. That's the period you have to repay the amount of your drawdown.

The Cash you Receive

Unlike a credit card, the personal LOC will actually give you cash in your bank account. When you draw down from the personal line of credit, you will get the money in your account rather than using a credit card to pay for a specific purchase.

The Best Financing Option for You

If you need money to pay for business projects, consolidate business debt or invest in anything related to a business, you might should consider a business loan and not a personal one.

At Camino Financial, we offer some of the most attractive business loans on the market. We offer loans with fixed interest rates, so your monthly payments are always comfortable. Plus, we don’t require collateral to secure them.
#CaminoTip How to Finance a Startup Business: 25 Ways to Get Start-up Business Loans
Apply for a business loan today to get started on financing your dreams. Apply For A business Loan!


Is a line of credit better than a personal loan?

In most cases, a line of credit is not better than a personal loan. There are several downfalls of a personal loan and a personal line of credit. This includes less flexibility, variable interest rates, and no set repayment period.

What’s better, personal loan vs. line of credit for debt consolidation?

In general, if you're looking to borrow money for debt consolidation, you should use a personal loan. This is because it will give you financial certainty when you're repaying, which you need when trying to get out of debt. In this case, it's not a great debate between a personal line of credit and a personal loan.

Should I get a loan or a line of credit?

If you're weighing the options between a personal line of credit vs. personal loan, you'll often find that a personal loan is a much better option. Getting a personal loan has more benefits than the ones you can get with a personal line of credit in the same circumstance.

Is a line of credit a loan?

A line of credit is not technically a loan because you are not borrowing a set amount of money and then repaying it with interest. Instead, a line of credit is an arrangement between you and a lender in which the lender agrees to provide you with a certain amount of credit you can use as you please.

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