At some point or another, you may need to borrow money.
When you’re looking into borrowing money, you may come across numerous options. Lines of credit and personal loans are two of the many options you can choose from. One of them could be a better borrowing option for you.
Boiled down, a personal loan is money that an individual borrows from a lender—typically a bank, credit union or online lender—that you receive up front in a lump sum and that you pay back over a set period of time.
Funds from a personal loan could be used to finance the costs of a dream wedding or a major renovation on your first fixer-upper home. With a fixed repayment schedule, a personal loan could also help you budget for repaying these major expenses.
The two types of personal loans are secured and unsecured.
The main difference between the two is that secured loans are backed by an asset(s) to secure the loan, while unsecured loans are not. Because the lender can’t seize your assets if you don’t repay an unsecured loan, the lender is taking on more risk.
With each, you apply for the loan through a lender, who will determine if you’re approved for the loan, which can be used on anything permitted by the terms of the loan agreement.
In many ways, a line of credit works similarly to a credit card.
You borrow money as needed up to a set maximum limit, like you would for a credit card, to pay for different expenses. However, whereas a credit card will only begin to charge interest if you do not pay the entire balance from the last billing cycle, a credit line will start to charge interest as soon as you borrow money.
Though you don’t get the shiny plastic rectangle, flight miles or other perks that often come with credit cards; you do get a set maximum amount of money that you can borrow from over a set period of time as you need to use it.
Lines of credit may also have lower interest rates than credit cards have, so they can be useful in that regard. But if you’re shopping around, be sure to compare all your options. For instance, how do they measure up to personal loans?
An important difference between personal loans and lines of credit relates to how you receive your funds.
For a personal loan, you receive all the funds up front in a lump sum. Then, you pay back the borrowed amount in periodic installments.
A line of credit is different from a personal loan in that once you’re approved, you can borrow the money on an ongoing basis as needed up to the borrowing limit. For example, if you immediately max out your line of credit, then pay all or a portion of it back, the amount of the repaid funds can then be borrowed again later, if you need, up to the full amount of the borrowing limit.
When you do borrow funds using a line of credit, you only have to pay back the amount you borrowed plus interest on that amount, not the entire amount of the approved credit limit. A line of credit might have a fixed end date that, assuming you want to continue the line, needs to be renewed by the lender once the original term expires.
While personal loans and lines of credit can be used interchangeably for the same financing needs, the main differences between the two options are how you want to receive the funds, the interest you’ll payback, the monthly payment amount, and how your credit can be impacted. A closer look at those considerations:
It’s important to do your research when borrowing money since there are so many options. Personal loans and lines of credit are just two of these options.
If you decide a personal loan is what you’re looking for, Marcus by Goldman Sachs® offers no-fee, fixed-rate personal loans that could be a better option when compared to higher-interest lines of credit.