Is a Personal Line of Credit Better Than a Loan?

Should you consider a personal line of credit?

When it comes to borrowing money, there are a few different options to choose from. One of the most popular options is to take out a personal loan, but another option you may consider is using a personal line of credit. A personal line of credit gives you access to a certain amount of money you can use as needed, while loans provide you with a lump sum at once. So which one is better? Here are the advantages and disadvantages of each so you can make an informed decision.

Personal lines of credit vs. loans

A personal line of credit (LOC) is similar to a credit card account. You have access to money up to your approved credit limit and whenever you need it. It differs from typical loans in that repayment need not be made in lump sums. Rather, the borrower may make payments whenever they are able, according to their schedule and budget. After paying it down, you can use it again and again.

Advantages of a personal LOC

With a personal line of credit, you can access funds whenever needed and borrow up to an agreed-upon amount. This gives individuals peace of mind, knowing they will have the necessary funding in case of an emergency or unexpected situation. Additionally, this type of loan typically allows users to make payments over time, allowing them to tailor monthly payments around their budget and income. You can create a more manageable payment plan with an LOC. Another advantage is the flexibility offered by a personal line of credit -- funds can be used when needed and repaid in small increments.

Disadvantages of a personal LOC

Having a personal LOC can be very useful for managing cash flow and repaying debts. However, it does have some drawbacks. You can easily rack up more debt if you aren’t disciplined. A line of credit is an open-ended form of debt, which could potentially lead to overspending and financial difficulty. This means that if you don't pay off your balance promptly each month, it can become expensive very quickly.

Lenders often impose strict criteria on eligibility for personal LOCs, so you may not qualify if you have an unsatisfactory credit rating or insufficient income. Lastly, if you have an LOC with a variable interest rate, then the bank can change the interest rate over time. In contrast, the interest is set for the term of a personal loan.

Is a personal LOC right for you?

One great benefit of a line of credit is the fact that you only have to pay interest on the money you actually borrow; so if you are careful about not taking out more than you need, then your payments will be lower than with a loan. A personal line of credit should only be used with caution and intent to pay off the balance quickly.

If you are a disciplined spender, then an LOC can provide you with more flexibility and peace of mind. For example, a personal line of credit may offer distinct advantages over traditional loans when dealing with recurring expenses or emergency situations requiring quick access to funds.

Ultimately when deciding between taking out a loan or using a personal line of credit for your financial needs, it really depends on what exactly those needs are and how quickly you need access to funds. Personal lines of credit are great for people looking for convenience and flexibility, since they offer access to funds up their approved limit. However, loans may be better suited for larger purchases since they offer fixed repayment terms and predictable monthly payments over time. Whatever borrowing route you decide to pursue, remember that researching all available options thoroughly is the smart move.