Personal Loans vs. Lines of Credit: Which Is Better?

When comparing a personal loan vs. line of credit, you may think there is little to no difference. Both offer you access to money, whether you need it for an emergency, a home improvement project, or to fund a major life event.

But, of course, there are differences and they can be more significant than you would originally think. Read on for a discussion of personal loans vs. lines of credit and to learn which one might work for you.

Reasons for Borrowing

Before even thinking about personal loans vs. lines of credit, you can start narrowing your choice by determining why you need to borrow the money.

Personal loans are usually used for large, one-time expenses. You usually have a good idea of how much you’ll need so you can borrow enough to cover but not more than needed. These loans are often used for special events, financing a large purchase, or paying off student loans or other debts.

But if you aren’t sure how much money you will need or when you will need it, a personal line of credit may work for you. Lines of credit are typically used for ongoing expenses, such as home improvement projects, overdraft protection, or in case of an emergency.

The Payout Process 

The biggest difference between a personal loan and a line of credit is how the borrowed money is paid out. 

With a personal loan, the amount you borrow is set and paid out once in a large sum. You receive the full amount you borrowed upfront and immediately after the loan is approved. 

A line of credit, on the other hand, is revolving. Instead of borrowing money all at once, you take out the money as it’s needed. The line of credit will have a credit limit, and you’re able to take out as much or as little money as needed, up to that limit. 

Interest Rates

Both personal loans and lines of credit charge interest on borrowed funds. The way the interest rates are determined is the difference.

Lines of credit have variable interest rates that are usually higher than personal loan rates. While this means that your payments on lines of credit will change, you will only be paying interest on the portion of the credit line that you use. 

Personal loan interest rates are fixed and typically lower than those offered on lines of credit. These interest rates are established during the application process and remain fixed for the life of the loan. Many factors can affect personal loan rates, including the length of the loan and even the amount borrowed.

Repayment

Another factor to consider when deciding between personal loans vs. lines of credit is the repayment process.

With a personal loan, your monthly payments are set at the beginning of the loan. The balance and interest earned are calculated, and then divided monthly to completely pay off your personal loan over the chosen repayment period.

Payments for a line of credit are not set up for paying off the credit within a certain time frame. Repayment periods are also not defined and might be longer than they would be with a personal loan.

Personal Loans vs. Lines of Credit: Make the Choice With OUCU!

Whether you choose a personal loan or a line of credit, you can’t go wrong with OUCU Financial . Start the application process with us today so you can use your money as you see fit when you need it most!

Personal Loans Personal Lines of Credit