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Personal Loan vs. Line of Credit: What Are the Differences?

If you’re in need of some quick cash, you’re far from alone these days. Recent research shows that U.S. consumer debt rose by a record $40 billion last November, with borrowers taking on a mix of traditional loans and revolving credit options.

But with so many choices available when you need some extra money, how can you tell which ones will be best for your wallet?

In this article, we’ll take a quick look at two of the most popular borrowing options—a personal loan vs. line of credit—to help you decide which one is right for your goals.

What Is a Personal Loan?

As the name suggests, a personal loan is a lump sum you take out for yourself rather than for a business or other expense. You can use it to fund any large purchase you need to make, or you can use it as part of a debt consolidation strategy.

With a personal loan, you’ll get a fixed interest rate and repayment schedule, which means that you’ll pay your lender the same amount of money each month. In other words, the best personal loans will allow you to budget for a set expenditure rather than worrying about varying payments.

What Is a Line of Credit?

By contrast, a personal line of credit works more like a credit card than a loan. As with other forms of revolving credit, you’ll be able to borrow any amount of money up to a set credit limit, and then you’ll need to make monthly payments toward that balance. You’ll only pay interest on the amount you borrow, though you’ll want to keep in mind that the interest rates may vary.

Note that there are two different periods to keep in mind with a line of credit. During your draw period, you can borrow funds as needed. After this period has ended, you won’t be able to borrow and will instead need to repay what you owe.

Personal Loan vs. Line of Credit: Which Is Better?

Both of these borrowing strategies have their own pros and cons, so it’s worth considering a few things before you make your decision. The best option for your needs will depend on what you need money for, how much risk you’re willing to take, and the predictability of your financial needs.

Personal loans are often better for large, one-off purchases. They’re also ideal for borrowers who prefer more predictable payments and fixed interest, and they tend to have lower interest rates.

Personal lines of credit are helpful for ongoing expenses, or for when you’re not sure how much you need to borrow. They’re only ideal if you feel comfortable with variable interest rates.

Find the Right Borrowing Options for You

Choosing between a personal loan vs. line of credit can feel frustrating, especially if you’re looking at the minute details of the paperwork from your lender. However, focusing on the big-picture differences may be enough to help you understand which one is right for your wallet. Don’t hesitate to reach out to a lender with more specific questions about your short-term financial needs!

Want more tips to help you make the most of your money? Take a look at our other personal finance posts for additional advice.

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