Line of Credit vs. Personal Loan: Which Is Right for Me?
- You can use a personal loan or personal line of credit (PLOC) to pay for a big expense over time.
- Personal loans come as a lump sum of cash, typically deposited into your bank account. You’ll pay them back over a set period of time with fixed rates that don’t vary with the market. APRs range from around 6% to 36%, depending on your credit.
- Personal lines of credit work like credit cards that you can withdraw from several times up to your credit limit. They have variable rates that currently range from around 9% to 36%.
What is a personal loan?
You have at least fair credit and need money for a one-time expense with a set cost.
A personal loan provides a lump sum of money via direct deposit or check that you’ll pay back in monthly installments, plus interest. You’ll typically make your first payment about 30 days after the lender disburses (or sends you) your funds. In the case of debt consolidation, some lenders will send funds straight to your creditors.
Personal loans are versatile and come with a wide range of loan amounts and terms. Your loan term is the length of time you have to pay back your loan. These span from 12 to 60 months, although some lenders offer 84-month terms (or longer).
Some lenders specialize in bad credit loans, but personal loan requirements vary. It will likely be hard to get a personal loan with a reasonable annual percentage rate (APR) if your credit score is lower than 580, the threshold for bad credit.
Even with bad credit, steer clear of loans with APRs above 36%. Experts widely agree that rates above this mark are predatory.
Personal loan rates
Personal loan rates currently range from about 6% to 36%. Use the rates below to see what you might pay based on your credit score.
| Credit tier | Average APR |
|---|---|
| Excellent (800 and above) | 11.77% |
| Very good (740-799) | 14.74% |
| Good (670-739) | 22.72% |
| Fair (580-669) | 30.17% |
| Poor (under 580) | 32.19% |
Personal loan pros and cons
Pros
- Predictable. Monthly payments on a personal loan are the same each month.
- Common. You may have an easier time finding a personal loan lender than one that offers lines of credit.
- More accessible. Some personal loan lenders approve borrowers with bad credit.
- Lower interest rates. Good-to-excellent credit borrowers will likely find lower APRs on a personal loan.
Cons
- Not revolving. You can only borrow from a personal loan once.
- Might pay more interest overall. Personal loans usually carry lower APRs, but interest applies to the total amount of your loan.
- Expensive for bad-credit borrowers. Getting a personal loan with rocky credit is possible, but prepare to pay high APRs.
Common uses for a personal loan
Lenders place few restrictions on how you can use your personal loan. Most lenders don’t allow you to use a personal loan for illegal activities, gambling, investments or student loans. Many people use personal loans for:
Debt consolidation: It’s possible to use a personal line of credit to consolidate debt, but it’s more common to use a debt consolidation loan. Consolidating only requires one transaction (taking out one loan to pay off several debts), but PLOCs are designed to be used over and over.
One-time home improvements: Consider a personal loan if you’re working on a home improvement with a set end cost, like a roof replacement. That is, if you’re confident you won’t have to fix any other issues along the way.
Emergencies: Emergency loans have fast funding timelines that could help you get the money you need fast when you’re facing an unexpected expense. You could even get same-day funds, depending on the lender.
What is a personal line of credit?
You have at least good credit and need money for ongoing, open-ended expenses.
A personal line of credit, or PLOC, is a type of revolving debt. In other words, you can borrow from it over and over, as long as you haven’t hit your credit limit. In this way, they are similar to credit cards.
Also, like credit cards, PLOCs have variable interest rates that go up and down based on market conditions. Variable interest can be risky in a turbulent or inflationary economic environment. On the flip side, they can be beneficial if the market is strong.
PLOCs are unique in that they (usually) have two cycles: a draw period and a repayment period.
Draw period: The draw period is the only time you can borrow from your PLOC. Here, you’ll also make minimum monthly payments on the credit you’ve used. These monthly payments free up your credit so you can use it again.
Repayment period: You can’t borrow during your repayment period. Instead, this is when you will pay the remaining balance of what you owe. Usually, you’ll do so in monthly installments, but some lenders require you to pay it as a lump sum.
Draw and repayment periods vary by lender, but are typically at least a few years apiece. PLOCs often have a maximum credit limit of around $10,000 to $100,000.
Generally, you must have at least good credit (a FICO Score of 670+) to qualify for a PLOC. Once approved, your lender may give you a card or checkbook to access your funds.
Also, note that there is more than one type of line of credit. These include home equity lines of credit (HELOCs) and business lines of credit. Today, we’re focusing on personal lines of credit.
Personal line of credit pros and cons
Pros
- Revolving. You can borrow from a PLOC over and over again, as long as you’re within your credit limit.
- Flexible. You don’t have to max out your PLOC limit if you don’t need the funds.
- Only pay interest on what you borrow. Interest doesn’t apply to your PLOC limit, rather, only on what you draw.
- Easy to use. PLOCs can provide quick access to cash when you need it, as you need it.
Cons
- Higher interest rates. Personal loans tend to have more competitive APRs for excellent-credit borrowers.
- Unpredictable billing. Your monthly payment fluctuates based on how much you borrow and your current interest rate.
- May have a minimum draw amount. Some lenders set a minimum amount you must borrow each time you use your PLOC.
- Might have more fees. Some lenders may have transaction fees, or an extra charge every time you use your PLOC.
Common uses for a personal line of credit
Personal lines of credit are ideal if you have expenses without a concrete total, such as:
Ongoing home renovations: A PLOC could be perfect for renovations that are likely to exceed your contractor’s quote. Say, a bathroom remodel. If you find mold after you tear out your shower, you’ll need extra funds that you might not have accounted for in your budget.
Living expenses after a medical procedure: You could get a medical loan, but a PLOC can also be a good choice, especially if you need help covering day-to-day expenses post-procedure. Utility and grocery bills fluctuate month to month, and the flexibility of a PLOC could be a great way to fill the gaps.
Overdraft protection: Some banks offer a personal line of credit as overdraft protection. Rather than declining the overdraw, your bank will charge the overage to your personal line of credit.
Comparing a personal line of credit vs. a personal loan
| Personal line of credit | Personal loan | |
|---|---|---|
| Fund distribution | Can borrow as needed during the draw period | Lump sum |
| Minimum credit score | Typically 670+ | Typically 580+, but some lenders accept bad credit |
| Typical loan amounts | Up to $100,000 | $1,000 – $50,000+ |
| Typical repayment terms | Variable, up to 7+ years; typically interest-only during draw period | Fixed, 12 to 84+ months |
| Interest type | Variable | Fixed |
| Interest accrual | Only applies to what you borrow | Applies to the total amount of your loan |
| Monthly payments | Can go up or down with rates | Stay the same for the life of the loan |
| Possible fees | Origination fee, application fee, late payment fee, annual fees, transaction fee, inactivity fee | Origination fee, prepayment penalty, late payment fee, check payment fee |
Questions to ask when choosing a personal line of credit vs. a personal loan
It’s always good to do a gut check before borrowing money. As you shop around, ask yourself:
1. What is my credit score?
Your credit score will determine your eligibility for a personal loan or line of credit. If you have a less-than-perfect borrowing history, you might not qualify for a PLOC. Instead, you might have to get a fair credit loan.
Check your credit score with LendingTree Spring. We’ll also throw in credit monitoring and personalized money-saving recommendations. And best of all? It’s free.
2. How often will I need to borrow?
The amount of money you can borrow with a personal loan vs. a line of credit is similar. However, each provides funds at different times during your loan’s life cycle. PLOCs make sense you need bits of money over time. Personal loans are better if you need an up-front lump sum.
3. Can I afford this loan?
No matter the type of loan you choose, it’s important to make sure you can pay what you owe — on time, every time. Use our personal loan calculator to see how borrowing could impact your monthly budget. If you’re considering a PLOC, talk to your lender about its repayment guidelines.
4. Are there better alternatives?
Before jumping into any loan, you should learn how different types of loans work and review their pros and cons. This can help ensure you choose the funding that can best help you reach your goal (and can save you the most money).
If you’re considering a PLOC, first learn the differences between a line of credit versus credit cards. If you only need a little money between paydays, a paycheck advance app might be a better fit than a personal loan. Or maybe you don’t need to borrow money at all and have time to save for what you need.
In any case, make sure the funding you’re applying for makes sense for the task at hand.
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