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Timothy R
By: timothy-ronaldson
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Personal Line of Credit vs. Personal Loan: Choose the Best Option

You will probably find yourself deciding between a personal line of credit vs. a personal loan, especially if you need some extra money.

Financing provided through traditional financial institutions and online lenders is great alternatives, but they have different financial products.

A personal line of credit and a personal loan are two of the most common ways to access extra financing. While there are some similarities to the two financial products, there are some differences, too.

It’s important to understand all these aspects, as they may sway your choice one way or the other.

Venn diagram of personal line of credit vs personal loan

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What is a Personal Loan?

Personal loans are a financial product in which the financial institution will give you a certain amount of money to use on whatever you want.

Unlike a line of credit, though, a personal loan will give you a specific amount of money with a specific interest rate and the repayment period.

This provides you with more certainty when it comes to the repayment period, although it doesn’t provide you the same flexibility in terms of when you take the money.

You can find both secured and unsecured personal loans.

How to Get a Personal Loan

The steps for getting a personal loan are very similar to getting a personal line of credit. In many cases, though, it will be a little easier to qualify for a personal loan. You may not need to provide as much documentation, for instance, as you do for a personal line of credit—depending on the lender.

You should be prepared to provide basic information and have collateral ready to use if you need to get a secured personal loan. 

Camino Financial doesn’t require collateral.

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

How does a Personal Loan Work?

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

Application and Funding

First, you complete a personal loan application with a financial institution, which will then take a look at your overall financial picture before making a decision.

They will take a look at your credit history and credit score, your debt-to-income ratio, your current employment situation, and your employment history, among other factors.

Then, the financial institution will approve you for a certain amount of money.

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 you with flexibility in terms of 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 end date to the loan repayment.

The Cash you Receive

Once approved, the bank will give you the amount all at one time, 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 whole amount of the loan.

Personal Loan Interest Rates

Personal loan interest rates can range anywhere from 5% to 40%, but they will vary depending on a number of factors. Primarily your credit history and credit score.

Generally speaking, if you have an excellent credit score that ranges from 720 to 850 as well as 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 rate 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 Personal Loan Credit Limit

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.

Pros & Cons of Personal Loans

When weighing your decision to get a personal loan, it’s a good idea to know the pros and cons. 

Here are some of the pros:

  • Easy to qualify for
  • Get all the money in one lump sum upfront
  • A defined repayment period and fixed interest rate (typically)

Here are some of the cons:

  • You can’t take a little bit of money at a time as you need it
  • Can have longer repayment periods
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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. The financial institution will approve a credit limit, and you can use money as long as you do not exceed the limit. It’s like a credit card.

Many businesses use a line of credit that they can tap into when they need to, but it’s not often the first financing option thought about for personal use.

In fact, most of the time, people only think that a personal line of credit is available through their home—which is 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 a bit more questions to understand 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.

How to Get a Personal Line of Credit

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, be prepared to enter all of your basic personal and financial information, including:

  • Full name
  • Date of birth
  • Address
  • Social Security number (or ITIN, if they accept it)
  • Sources of income

You may also need to provide proof of your income or proof 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)

How does a Line of Credit Work?

If you asked yourself, “what is a personal line of credit¡” you definitely need to understand how one works.

Application and Funding

A line of credit works similarly to a credit card. You will apply for a line of credit with a financial institution. If they approve your request, they will extend you a certain amount of money that you can use when you want to 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 on a monthly basis, 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 as much as five years.

That’s the period of time 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.

Unsecured loans are personal lines of credit, just like most credit cards. But there are some secured lines of credit out there, which will require you to put up collateral in order to get the line.

Line of Credit Interest Rates

Typically speaking, 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 range quite a lot, depending on a number of factors. First, they will depend on your personal credit history and your credit score.

The higher your score and better your history, the lower your interest rate will be generally—and vice versa.

Second, the interest rate will depend on the financial institution 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.

LOC Credit Limit

Again, the overall limit on a personal line of credit can vary greatly.

The amount of credit that you will receive depends on a number of factors, including your credit report and score, the financial institution, and your 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 offer a credit limit of as much as $100,000—though most don’t go that high.

Pros & Cons of a Line of Credit

Just like personal loans, there are positives and negatives to getting a line of credit.

Here are some of the pros:

  • Can draw down money as you need it
  • Only have to pay back what you used

Here are some of the cons:

  • 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

Now that you better understand personal line of credit vs personal loan, let’s see which one is a better option for you.

illustrated woman considering two financing options


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How is a Line of Credit Different from a Loan? Personal Line of Credit vs. Personal Loan Differences

There are a few things that stand out as differences between a line of credit vs. a fixed-term loan.

How Much Money you Receive and How

Most people will not qualify for an extremely large limit with a line of credit.

That’s why when they’re weighing the options between a personal line of credit and a personal loan, many people prefer the higher limits that a personal loan offers.

Another main difference is how they will give you the money.

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 to this, though, is that you are actually limited by what you can do with a line of credit.

The bank will limit how much you can draw down at any one time with a personal line of credit, even if you have a high credit limit of $20,000 with a personal line of credit. For example, your line of credit may limit you to a maximum drawdown of $2,000.

This would severely limit what you could do with that line of credit, if 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 approves.

Receiving a lump sum amount gives you the financial freedom and flexibility to fund whatever projects you need or pay for whatever you want all at once.

Repaying the Financial Product

Another main difference between a personal loan and a personal line of credit is the repayment terms and structure.

This is a major downfall of a line of credit because it is a revolving credit 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 at 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 be making the set monthly payments that allow you to pay off the loan in a reasonable amount of time.

While this doesn’t provide as low a minimum monthly payment as a line of credit, it does provide you with financial certainty.

It’s also much more likely when looking at a personal line of credit vs. a personal loan that you will find the best personal loans with fixed interest rates.

Again, this gives you stability as you’re repaying the money you borrowed.

You know that your payment will be the same every month, no matter what happens with interest rates.

When it comes to a personal line of credit vs. a personal loan, a personal loan seems to be the winner in most cases, right?

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The Best Financing Option for You

If you need money to pay for projects, consolidate debt or take a vacation, you might be looking at outside funding such as a personal line of credit vs. a personal loan.

While a personal line of credit may seem like a good option for you, in most cases, a personal loan is a much better option.

At Camino Financial, we offer some of the most attractive personal loans on the market.

We are constantly working to live up to our motto of “No Business Left Behind,” and we do that through all the loan products we offer, as well as the educational and informational tools we share.

We offer personal loans with fixed interest rates so that your monthly payments are always comfortable. Plus, we don’t require collateral to secure them.

We even accept ITINs instead of requiring applicants to have a Social Security Number.

Apply for a personal loan today so you can get started on financing your dreams.

We invite you to keep reading: What are loans for bad credit guaranteed approval?

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FAQs About Personal Lines Of Credit and Personal Loans

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 a number of 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 go with 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. a 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.


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