Personal Loans vs. Personal Lines of Credit

Personal loans and personal lines of credit (PLOCs) are both meant to cover big expenses or large purchases. The primary difference between these products lies in how you receive your funds. Borrowing a personal loan means receiving a lump sum, while a personal line of credit functions similarly to a credit card.

Both personal loans and personal lines of credit can be a good way to borrow money. The best one for you depends on your financial habits — and what you intend to do with the money.

Personal loans vs. lines of credit

Personal loans allow you to borrow a one-time lump sum of money with fixed monthly payments, while personal lines of credit allow you to access a revolving credit line (similar to a credit card) that you can borrow from as needed. Personal lines of credit can be reused as you repay them.

You may want to use a personal loan if you know how much you need to borrow. A PLOC is best for times when you have a large project or event that doesn’t have a set budget, such as a wedding or a home renovation.

How they’re similar

• Both allow you to borrow money for nearly any legal purpose.
• Both usually have lower rates than average credit card interest rates.
• Both loan options are available through a variety of institutions, including banks, credit unions and online lenders.
• Both are typically unsecured forms of debt, which means they don’t require collateral to secure the loan.

How they differ

• Personal loans have a fixed repayment term, while personal lines of credit have a draw period where you may only pay interest. At the end of the PLOC’s draw period — typically two to five years — you enter the repayment phase. Repayment may involve monthly payments on the balance or a single balloon payment.
• Personal loans typically have fixed interest rates, and PLOCs often have variable interest rates during the draw period and a fixed rate once this period ends.
• Personal loan payments are the same each month, but PLOC payments can vary from month to month, depending on how much you borrow and the current rate on the credit line.
• Personal loan lenders often cap amounts at $50,000, though amounts up to $100,000 may be available to excellent credit borrowers. Personal lines of credit may have limits closer to $20,000.
• Personal lines of credit allow you to pay back only the amount you borrow (could be less than your limit), but with personal loans you must pay back the full amount received at disbursal.

Personal loans

Personal loans give you a fixed amount of funding distributed in a lump sum, usually between $1,000 and $50,000. In most cases, your personal loan payments will be the same each month because they have fixed interest rates. Repayment can last anywhere from one to seven years — the longer your term, the more you’ll pay in interest overall.

You can get a personal loan from a local bank, credit union or online lender. The best rates are usually reserved for borrowers with good credit, usually a score of 670 or higher. However, there are bad credit personal loans available — just expect to pay more in interest.

Personal loans are normally used for:

Pros

• Funding in one lump sum
• Consistent payment amount
• Fixed interest and repayment timeline
• Funds can be used for nearly any purpose

Cons

• Potential origination fees
• Monthly payment based on full borrowed amount
• Stricter eligibility requirements

Personal lines of credit

Personal lines of credit are an unsecured revolving credit line, similar to a credit card. They have variable rates, which are usually tied to the prime rate (plus a lender margin). Unlike a personal loan, lines of credit rarely stretch beyond $20,000, and lenders will set your limit based on your income and other aspects of your finances.

A line of credit could be an ideal solution if you’re trying to manage a significant purchase or a major expense but aren’t clear on the overall scope of the costs. While your payments on a personal line of credit will change due to variable interest rates, you’ll pay interest only on the portion of the credit line that you use. Personal lines of credit may be available from your community bank or through a variety of online lenders.

Personal lines of credit are normally used for:

Pros

• Pay only for what you use
• Lower interest rates than credit cards
• Ongoing access to funds
• Funds can be used for nearly any purpose

Cons

• Variable interest rate and fluctuating monthly payment
• Lower borrowing cap
• Can impact your credit utilization ratio
• Strict eligibility requirements

Alternatives to personal loans and lines of credit

While personal loans and personal lines of credit are useful financial tools, they won’t always be the right choice. Credit cards offer similar flexibility as lines of credit — with added benefits. Using your home’s equity can also be a good way to secure a much more favorable interest rate.

• Credit cards: The best credit cards offer benefits like cash back or travel points when you spend. While their rates are higher than personal loans or PLOCs, you can avoid interest charges by paying off your balance before the due date.
• Home equity loans: A home equity loan uses the equity in your property as collateral. Secured loans tend to have lower rates, but because they act like a second mortgage, you could lose your home if you default.
• HELOCs: A HELOC, or home equity line of credit, works similarly to a home equity loan. It uses collateral, but like a personal line of credit, you borrow what you need and only pay interest on that amount.
• Cash advances: While cash advances have higher rates than simply using your credit card, they can come in handy if you only need a small amount. However, prioritize other alternatives to avoid hefty fees.
• Buy now, pay later: Buy now, pay later (BNPL) apps and services give you access to flexible, interest-free financing when you make a purchase. But while convenient, they can lead to overspending.

Bottom line

Personal loans and lines of credit serve a similar purpose but function differently. A personal loan provides a single lump sum of money that is repaid in fixed monthly installments. A line of credit offers ongoing access to funds and comes with variable rates.

Compare both options carefully, and look for lenders offering borrowing terms that fit your needs. The best choice for you will depend on your current finances and how you want your repayments to look.