Personal Loan vs Line of Credit
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Debt Options: Personal Lines of Credit vs Personal Loans
If you’re looking to borrow money, there are many different options. There is often confusion between personal loans and personal lines of credit. Since there are important differences, we will compare the two so you can make the best decision for your plans, projects, and financial future.
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Learn More About Personal Loan vs Line of Credit
When borrowing money, people often compare a personal loan vs line of credit. A lot depends on your financial situation and what you want to accomplish. When considering a personal loan vs a line of credit, one definitely has more flexibility than the other. Keep reading to explore the advantages of both as we help you determine which option is better for you.
Read more - FAQ+
Is a personal loan better than a line of credit?There is no right or wrong answer to this question. It depends on what you plan to do with the funds and how you like to manage repayments. We will look at the benefits of both a little later on to help you determine which would be best for you.
What’s the difference between a personal loan and a personal line of credit?Let’s start by understanding some of the similarities of a personal loan vs personal line of credit. Both have an interest rate that is applied to the amount borrowed that you will have to repay and both have a maximum loan amount. They each have a payment that must be paid regularly that is based on the amount borrowed. It is usually a monthly repayment plan.
There are quite a few differences between a personal loan vs a line of credit. A personal loan provides a fixed amount that is advanced immediately. In addition, personal loans usually have a fixed rate of interest for the full term of the loan and a fixed payment to pay it off during a certain time period-for example, 36 months. Once it is fully paid, the loan is closed and if you want to borrow more money you will need to reapply for credit.
A personal line of credit has a lending limit that you can draw down as you need it based on what your lender qualifies you for. Lenders often provide a “draw period” which is the time that you have available to draw down the funds. This “draw period” can be for a number of years. Your payment will be based on the amount borrowed and is usually a percentage of the amount owed, for example, 2% of the amount borrowed. The rate on a line of credit is variable and not fixed like a personal loan. The last major difference is that you will have continual access to the limit during the “draw period” if there is one as long as the account is in good standing.
As you pay it down you can borrow up to the approved amount again without having to reapply for credit. There are a variety of different payment structures for lines of credit. A personal line of credit can have repayment conditions like a repayment period, balloon payment, a demand payment. It might have no set repayment conditions as long as you make your minimum payments.
Does a personal loan look bad on credit?Having a personal loan on your credit report may initially reduce your credit score. Over the long term it can sometimes improve your credit score if you are making payments regularly and on time.
What is the difference between a line of credit and a loan?Many people want to know what the difference is between a personal line of credit vs a personal loan. A personal line of credit has a credit limit you can access repeatedly as you pay it off, the interest rate is variable and the payments are usually a percentage of the amount you borrowed.
A loan, on the other hand, advances the full amount of the funds immediately, usually has a fixed payment, a fixed interest rate, and the credit limit cannot be accessed after the initial advance. If you want to borrow more money you would need to reapply.
Does opening a line of credit hurt your credit score?Opening a line of credit may initially reduce your credit score slightly but if you establish a history of making your payments by the due date it could help improve your credit score.
Which bank gives the best line of credit?Many lenders offer lines of credit. If you are looking for a line of credit, you may want to check with your primary banking institution. It’s likely that you already have a trusting relationship with them. However, it’s important to know what you are looking for in terms of the amount you want to borrow, the rate you are comfortable paying, and the repayment terms you want. While banks like Wells Fargo may offer competitive lines of credit, you may not qualify for the advertised terms. As a borrower you should have realistic expectations and explore available options.
Can you withdraw cash from a personal line of credit?You can withdraw up to the amount you have been approved for. If you have already withdrawn some funds, you can withdraw the remaining limit. This is one of the great features of a personal line of credit vs a personal loan.
What credit score is needed for a personal line of credit?Lines of credit are usually considered revolving credit. While the credit score requirements vary depending on the lender, a borrower should normally have a credit score of about 700.
Should I close my personal line of credit?A line of credit is often used to finance projects where the exact cost is unknown such as home renovations or it could be used to pay for an emergency that a borrower can’t cover. There can be annual fees to keep it open. A person may consider closing it if they feel they are overextending themselves financially or if they have sufficient funds to handle unexpected expenses. Before closing the line of credit, you should check with the lender to see what consequences or benefits may be involved.
Is it hard to get approved for a line of credit?Approval for a line of credit can depend on many factors. Most lenders look at a borrower’s income and employment as a starting point. This is to make sure that the borrower has sufficient income to pay back the amount they borrow without getting in over their head financially. Another consideration is how much open credit the client already has. If a client already has a lot of debt it will be more difficult to qualify for a line of credit. Most lenders will review the applicant’s credit history to see if the client has repaid their existing debts on time. If you have good credit and consistent income, you should be able to qualify for a personal line of credit.
What is the benefit of a line of credit?There are many benefits of a personal line of credit vs a personal loan. For starters with a personal line of credit you can continually borrow up to the approved amount as long as the account is in good standing. In addition, you can use the funds for whatever you like. Lastly, you can access the funds as you need them rather than getting the whole amount up front. This can help you save money on interest. A personal loan of credit may offer more flexible payment options compared to a personal loan.
When should you use a line of credit?Lines of credit are best used for two situations. The first is when you are funding a project where the exact costs are unknown and/or it needs to be completed over time such as home renovations or a wedding. The second scenario is when you wish to have access to funds in case of an emergency or unexpected expense.
If you are considering either a personal line of credit or a personal loan, comparing the pros and cons of each is an important first step. To recap, with a personal line of credit you can continually borrow up to the approved amount as long as the account is in good standing. A personal line of credit and a credit card share some similarities but a personal line of credit usually has much lower interest rates. It may offer significantly higher credit limits as well. A line of credit can be a great addition to your financial plan. However, if you are looking to borrow a one time lump sum, a personal loan may be a better option. In addition, since personal loans usually have a fixed interest rate and monthly payment, they may be easier to manage. In most cases, a personal line of credit and a personal loan do not require collateral. If you are considering both options, it may be beneficial to start by checking personal loan offers.
Acorn Finance has trustworthy lending partners that can offer personal loans with APRs as low as 6.99% depending on your credit score. Individuals can discover simple and competitive payment options through Acorn Finance. At Acorn Finance, you can submit one application and receive loan offers in 60 seconds or less with no impact to your credit score. Once you have claimed the best offer and finalized the loan, you can receive funds quickly.
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