When it comes to Personal Loans and Personal Lines of Credit, the options for how to use the funds are endless. However, while both offer flexibility in all the different ways you can use the funds, there are certain instances where choosing a Personal Loan would be a better fit than a Personal Line of Credit and vice versa. Let’s explore your options and help determine which is the best choice for you and your budget.
Consider the nature of the expense
Personal Loans are distributed in one lump sum and are typically best for large, one-time expenses. Examples include back-to-school costs, paying off high-interest debt, and higher education costs are a few examples. In contrast, Personal Lines of Credit are revolving and operate similarly to a credit card where you only pay on the amount you use for a specified term. This credit line is consistently available – once you pay off the money you have borrowed, the funds open up again.
A Personal Line of Credit can be optimal if you aren’t sure how much money you will need to borrow or for how long. Examples of ways to use a Personal Line of Credit are: supplementing irregular income, home improvements, and backup for when unexpected expenses arise. Therefore, if you’re looking for a shorter-term solution, a Personal Loan might be the better option if you’re also considering a Personal Line of Credit.
Evaluate the terms and how it fits with your budget
An easy way to remember the difference between a Personal Loan from a Personal Line of Credit is a loan is fixed and a line of credit, can change over the term. Therefore, if you’re looking for a way to budget a certain amount each month, a Personal Loan ensures you pay a set amount each month for the life of the loan. With a Personal Line of Credit, while the term is longer and you only pay on what you use. For example, if you are extended a $10,000 credit line and only use $2,000 of the money, you will only have to make payments on the amount you’ve used. Alternatively, if you have a Personal Loan, you make payments on the total amount of money borrowed, whether you’ve used the funds or not.
Qualifying for a Personal Loan vs. a Personal Line of Credit
Typically, receiving approval for a Personal Line of Credit is more challenging to obtain than a Personal Loan. Why? Due to the flexible nature of a Personal Line of Credit, having a healthy credit score plays a significant factor in the decision to approve funding. Whereas, a Personal Loan with its fixed term and amount borrowed, allow for easier approvals.
Making the decision
Why is it important to know the differences beyond the interest rate when it comes down to Personal Loans and Personal Lines of Credit? While often confused, these loan types have distinct differences that, if not chosen wisely, you could end up paying more. If you’re looking to fund your next step, Great Meadow Federal Credit Union can help you achieve your goals. Talk to us today about your options and how to choose the right solution for you.