Line of Credit vs. Personal Loan

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.

What is a personal loan?

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.

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Sometimes, you have to manage debt, juggling expenses such as credit card expenses and more. Other times, like when you want to finance a kitchen upgrade, for instance, you may be planning for debt. Whether you're managing or planning for debt, it can all be overwhelming. Well, there's a tool that may help. Marcus by Goldman Sachs presents: Personal Loans. What exactly is a Personal Loan? A Personal Loan is usually an unsecured loan, which is a loan granted on factors such as your creditworthiness. Unsecured loans do not require you to put up your possessions as security. Some Personal Loans offer low, fixed interest rates and monthly payments. This means you may be able to avoid the sometimes high interest rates for credit cards and, potentially, their late fees on missed payments. Why would you need a Personal Loan? Personal Loans can be used for a number of reasons. One way they are used is to manage existing debt. Another is to fund future expenses. Are you getting married soon? There's a Personal Loan for special occasions. Did your dog take a liking to your new couch, or are you remodeling your kitchen? There's also a Personal Loan for home improvement. Do you just want to simplify your debt, potentially getting a lower interest rate than on your credit cards? There's a Personal Loan for debt consolidation, too. How do you apply for a Personal Loan? You're watching this online, so you're already in the right place. You can apply for a Personal Loan online, or apply in-person at a bank if that's more your style. So, the next time you're managing existing debt, or planning for a major purchase, ask yourself: 'Can a Personal Loan help with this?' Chances are, it can. Our Personal Loans have fixed monthly payments, fixed interest rates, and no fees. Ever. Learn more about Personal Loans at Marcus.com.

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.

What is a line of credit?

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?

Line of credit vs. personal loan: What’s the difference?

An important difference between personal loans and lines of credit relates to how you receive your funds.

How (do you get the 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.

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A line of credit works similarly to a credit card: you get access to funds up to a certain limit, and you can borrow up to that amount, as needed. A personal loan, on the other hand, is money lent to you, the borrower, usually with a fixed interest rate. They are then generally repaid by the borrower in installments over time. But keep this in mind: whatever you borrow today, you have to repay tomorrow.

What’s the best option for you?

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:

Personal loans are delivered in one lump sum; lines of credit allow you to borrow fund as you need them.

Personal loans often offer lower interest rates and fixed repayment schedules; even though lines of credit can have smaller minimum payment amounts they are known to have higher interest rates.

Lines of credit could directly affect your credit score more significantly than a personal loan.

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.

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This article is for informational purposes only and is not a substitute for individualized professional advice. Articles on this site were commissioned and approved by Marcus by Goldman Sachs®, but may not reflect the institutional opinions of Goldman Sachs Group, Inc., Goldman Sachs Bank USA or any of their affiliates, subsidiaries or divisions.