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Deciding Between a Personal Loan vs. Line of Credit

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From buying a car to covering unexpected home repairs, personal loans and lines of credit can be a great way to fund major expenses. Learn key differences between the two so you can choose the right lending solution for you.

When you need money to finance an expense, options like a personal loan or line of credit can help. These financing vehicles help you cover what you need now by allowing you to pay back what you owe over time. In this article, we discuss the difference between a personal line of credit vs. a personal loan so you can choose the lending solution that makes the most sense for your financial situation.

What is a personal loan?

A personal loan is a lump sum of money that you borrow and pay back over a specified period of time. Personal loan payments are fixed monthly payments, with a fixed term length and fixed interest rate. You’ll know exactly what you owe each month and by when you can expect to pay the loan off.

Personal loans may last one or multiple years. You may need to secure a loan by offering up collateral, like a home, in order to get approved. Unsecured personal loans don’t require collateral.

To get a personal loan, you’ll also need to agree to loan terms. These include when you’ll make payments and how much you’re expected to pay, as well as late fees. If you don’t meet the obligations of the loan terms, your credit score may be impacted and/or you may be required to pay fines.

Common uses of a personal loan

Personal loans are typically used for single expenses that have a specific price tag. Here are some common uses of a personal loan:

  • You’re paying for a large purchase, such as using an auto loan to buy a car
  • You’re paying for a budgeted event, such as a wedding
  • You need to finance moving expenses, such as paying for professional moving services
  • You want to consolidate debt, such as credit card debt or student loans, at a lower interest rate

Why would you take out a new form of debt (a personal loan) to pay off other debt? A personal loan could have a lower interest rate than what you’re paying for your credit card or student loan debt. In these cases, you can use a personal loan to consolidate your debt and lower the overall interest you pay. 

What is a personal line of credit?

A personal line of credit is a borrowing limit you can access, similar to a credit card. It’s a type of revolving credit, which means you can borrow up to the credit limit, pay off all or part of your balance, and then borrow up to the limit again. How much you pay each month depends on what you’ve borrowed. Like with credit cards, a minimum monthly payment is typically required and you only pay interest on what you borrow.

A personal line of credit makes sense when you incur expenses that may fluctuate over time. You’re able to borrow any amount up to the limit so you have more flexibility regarding how much you borrow and what you borrow for. Lines of credit like a home equity line of credit (HELOC) can be used for planned and unplanned expenses.

Common uses of a personal line of credit

You might be interested in using a personal line of credit for an expense that isn’t defined up-front. Here are some common uses of a personal line of credit:

  • You’re renovating your home or want to be prepared for unexpected home expenses, such as flood damage, roof repairs, etc.
  • You’re paying for ongoing medical expenses that may fluctuate over time
  • You want protection for emergency expenses, such as car repairs
  • You have an unpredictable income and want the security of an accessible line of credit

For things like emergency expenses, fluctuating costs and peace of mind, a personal line of credit lets you access funds when you need them.

What’s the difference between a line of credit vs. a credit card?

When comparing a line of credit vs. a credit card, both come with a maximum credit limit that specifies how much you’re allowed to borrow. However, a line of credit typically provides a higher credit limit than a credit card. That means there may be stricter credit requirements in order to get a line of credit. Lines of credit also tend to offer lower interest rates than credit cards.

The difference between a line of credit vs. a credit card may come down to what you plan to use them for. Since lines of credit typically have higher credit limits, they may be a better option if you want to have financing options for costly emergency expenses. If you’re looking for a way to finance everyday expenses, and potentially earn rewards for your purchases, a credit card may be the way to go. Choosing between a line of credit vs. a credit card isn’t necessarily an “either/or” scenario; you may choose to have both.

Personal line of credit vs. personal loan: which is right for you?

When should you use a personal loan vs. line of credit? It depends on what type of expense(s) you have and how you prefer to pay off what you owe.

If you have a single, large expense and know exactly how much it’s going to cost, you might want a personal loan. A key difference between a personal loan vs. line of credit has to do with term lengths and payments. With a personal loan, you make predictable monthly payments and know precisely what you’ll owe for the duration of the loan. With a line of credit, how much you owe depends on how much of the line of credit you’ve tapped into.

Another difference between a personal line of credit vs. a personal loan is that the former can be used for multiple expenses that have unclear amounts. When you’re not sure how much you’ll need to borrow, but would like to have a lending option readily available, a personal line of credit makes more sense. This is why a personal line of credit can be ideal for emergency situations. If you don’t use your personal line of credit, you won’t make payments; additionally, you only pay interest on what you owe. As you pay back what you owe, your credit limit also increases.

Check out the table below to compare more key differences between a personal loan vs. line of credit.

  Personal Loan Personal Line of Credit
How it works   Single lump sum amount borrowed for a specific amount of time; can be secured or unsecured  Pre-assigned credit limit, with money that can be reused as you repay it; can be secured or unsecured
Interest and fees  Interest rate is fixed and typically lower than a line of credit; may require late fees  Interest rate is typically variable and higher than a personal loan; may require late fees and annual fees
Term length and payments  Has a fixed term length and is paid back through fixed monthly payments Term length and monthly payments vary; monthly payment is based on how much money you have outstanding, with interest only paid on the amount of money you owe
 Typical uses

Typically used for predictable, one-time purchases that have a clear total, such as:

  • Buying a car
  • Paying for a wedding
  • Financing moving expenses
  • Consolidating credit card or student loan debt

Typically used for unpredictable expenses or those without a clear upfront cost, such as:

  • Unexpected home renovations
  • Ongoing medical expenses
  • Car repairs
  • Other emergency expenses

Learn more about Cadence Bank’s personal loans and lines of credit

Cadence Bank offers both personal loans and lines of credit. Our strategic advisors are here to help you with personalized recommendations. Learn about our personal loans and lines of credit, or read more about personal finance in our other insights and articles.

This article is provided as a free service to you and is for general informational purposes only. Cadence Bank makes no representations or warranties as to the accuracy, completeness or timeliness of the content in the article. The article is not intended to provide legal, accounting or tax advice and should not be relied upon for such purposes.

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