Line of Credit vs. Loan: Which Suits You Best?
Maintaining your financial health is tricky with so many credit options available to almost anyone. From personal loans and quick payday loans to lines of credit - each has its advantages and disadvantages, which aren't always that obvious. So, a line of credit vs a loan - what wins? Let's analyze and compare some of the most useful financial solutions and finally find the answer to that question.
Table of Contents
- Understanding Lines of Credit and Loans
- Line of Credit vs. Personal Loan: Comparative Analysis
- Choosing the Right Option for You
- Tips for Financial Health
- Final Thoughts
- People Also Ask
Understanding Lines of Credit and Loans
First, let's start with understanding what we're working with. Below is an overview of both traditional and non-traditional loans as well as credit line options.
What is a Line of Credit?
A line of credit is a flexible loan from a bank or other financial institutions that provides a set amount of credit. You can turn to your credit line anytime as long as you don't max out your credit limit.
You are obliged to make minimum monthly payments and don't have to repay the full amount you borrowed. Your outstanding balance will be subject to an APR. For example, if you used $1,000 and only paid $600 on the due date, the remaining $400 will incur interest. Depending on your lender, you might have a grace period and only pay interest on your debt within several months to a few years.
What is a Loan?
Unlike lines of credit, a loan provides a lump at once which you have to return within a set period of time. Here is a more in-depth explanation:
Traditional Loans
Traditional loans generally offer up to $100,000 or more, depending on the type. You need to pay interest on the full amount. Traditional lenders typically require you to have a decent credit score typically no less than 680. However, an unsecured loan might require at least 700 to qualify. Your rating won't only affect the lender's decision but also influence the interest rate you are offered.
Some traditional loans have long processing times, so be ready to wait for weeks for a response. The funding can also take quite a while from 1 business day to a couple of weeks or even months.
Bad Credit Loans
Payday loans and bad credit personal loans don't require a hard credit check so they are better suited for those with less-than-perfect credit scores. The lenders typically base their decision on the borrower's general financial situation and monthly income. Many financing companies make their decision almost instantly, and you can expect the funds to reach your bank account within 1 to 2 business days. Your repayment period can range from 14 days to 24 months.
Learn about the difference between payday loans and installment loans.
Line of Credit vs. Personal Loan: Comparative Analysis
Let's dive into the specifics of each loan and compare their typical terms and conditions.
| Personal Loan | Line of Credit | |
| Hard Credit Check | Yes | Yes |
| Max Amount | $1,000-$100,000 | $1,000 to $50,000 (credit limit) |
| Minimum Credit Score | 680 | No less than 580 |
| Annual Percentage Rate | 5.99%-35.99% | 18% to 30% (variable) |
| Repayment | 12 - 60 equal monthly payments | In regular monthly payments |
| Funding | 2-5 business days | Several days to weeks |
| Collateral | None | Usually none |
As you can see, each option caters to different financial needs and circumstances.
Is it harder to get a loan or a line of credit?
Getting any traditional loan can be quite difficult if you have a low credit rating. Approval and funding times vary, depending on the type of loan and the lender, however it can take weeks to gain access to your money. A bad credit personal loan is significantly easier to get thanks to its lenient requirements. As long as you are at least 18 years old and have proof of stable income, you can request a loan.
Choosing the Right Option for You
So, which option is the right choice for you? Analyze the aspects below to make an informed decision.
Assess Your Financial Needs
Do you need a lump sum to cover specific expenses like an important purchase or medical treatment? In that case, a personal loan to pay bills will be a more viable option. If you need extra cash each month for smaller purchases, then a line of credit will be better for you.
Consider Repayment Terms and Flexibility
A line of credit allows you to adjust your monthly payments according to how much you spend. Regular loans, on the other hand, typically oblige you to make set payments on the established dates. If repayment flexibility is more important to you, then a line of credit would be the right choice.
Tips for Financial Health
There are some good strategies that can help you handle your debt and improve your general financial situation.
Plan Your Expenses
Track your monthly spendings. It's useful to know exactly how much you spend on your living, loans, entertainment, and unnecessary purchases. Cutting down on expenses you don't really need, such as takeout and Starbucks, is the first thing to do to improve your financial situation. Being aware of where your money goes can help you create a better monthly budget. This, in turn, can increase your savings and help you repay your debt faster.
Budgeting Ideas
Afterwards, you can look into budgeting strategies.
- The 50/30/20 Rule. This rule implies you allocate 50% for your needs, 30% for your wants and 20% for savings and debt repayment. If you receive a $3,000 paycheck, you'd use $1,500 for your rent, food, bills and commuting. $900 would go to eating out, parties and personal purchases, and $600 should either be put aside or used to cover your debt.
- The Zero-Based Strategy. Alternatively, you can use the zero-based strategy. It means you assign a purpose to each dollar of your paycheck. For example, instead of allocating $900 for a very general purpose such as leisure, you can allocate $300 for clothes, $300 for dining out, $100 for coffee and $200 for movies and events.
- The Envelope System. It's easier for some people to keep track of their expenses when they interact with money physically. The envelope system suggests using cash to split up your paycheck. There are plenty of pre-made options you can purchase that allow you to allocate money for various purposes.
Final Thoughts
The winner of the line of credit vs loan battle depends on your needs and circumstances. Credit lines are better for those who need varying amounts of money each month, while loans are an excellent choice for those who need a one-time lump sum for a specific purpose. Additionally, thanks to the large number of loan types, you have more flexibility in terms of how much you can get. Do your research before choosing one option or another and you'll be sure to get a financial solution that suits your needs.
People Also Ask
What is the disadvantage of line of credit?
It's harder to get for those who have a bad or no credit history at all. In addition to that, you might face higher interest rates and lower limits in comparison to personal loans. Additionally, credit lines might lead to overspending and debt accumulation.
How to improve my chances of approval for a loan?
You need to maintain good credit and provide proper proof of income. If you have stable income from freelancing, rent payments or even investments, use it to your advantage. This will help you increase your overall monthly income and even allow you to get a better deal.
What documents do I need to apply for a line of credit?
You'll typically need your ID (driver's license or passport), Social Security number, recent pay stubs, tax returns or bank statements. You might also be required to provide an employment verification letter and your bills as proof of residency.
What is the advantage of a line of credit over a regular loan?
A line of credit allows you to borrow amounts you need at the moment and don't pay interest on the entire balance. Then, you can repay the funds by making small minimum payments, which provides more flexibility.
How do I repay a personal loan?
To repay a personal loan, you need to make equal monthly or bi-weekly payments until the loan is repaid in full. Most lenders allow automatic payments. This way, you only need to ensure you have sufficient funds on the due date. The amount you owe will be withdrawn electronically according to your repayment schedule.
What happens if I can't pay my credit card?
If you don't pay off your credit card completely, you'll pay interest on the amount you owe. If you don't make the minimum payment, this will be reported to credit bureaus which will significantly damage your credit score. In this situation late fees are likely to be applied and your interest rate might increase.
Let us find the best loan offer for your emergency needs! Apply Online NowI read and agree to Terms, Rates, Privacy Policy before submitting a loan request.