Line of credit vs. personal loan: which one is right for me?
It’s no secret that America is a nation that runs on debt. Whether we’re facing student loans, medical bills, or credit card debt, it’s simultaneously comforting and a bit concerning knowing that we’re not alone when it comes to debt. If achieving financial freedom is a part of your long-term plan, you must know that choosing the right solution will be key when helping—and avoiding worsening—your financial situation. If you open your laptop and look for financial aid options on the internet, it’s likely that you’ll come across two options: lines of credit and loans, but which one is right for you? Here’s a summary of both to help you understand the pros and cons.
Line of credit
As much as we’d like to avoid it, oftentimes life throws us unexpected events that result in debt. From emergency surgeries to car accidents, it is not uncommon to find yourself struggling to pay bills and maxing out your credit card to stay ahead. So what’s a good solution to help you stay afloat after an unfortunate event?
Enter lines of credit – According to Experian, one of the three credit bureaus in the United States, “a line of credit is an account you can have with a bank or credit union that allows you to borrow money when you need it, up to the preset limit for the line. Interest is only charged once you borrow money. When you pay back any borrowed funds, your available credit line is replenished.”
Line of credit pros and cons
If you have a good credit score (usually above 700), the interest rate in your line of credit could be reasonably low. On the other hand, it only makes sense that if your credit score is low (below 580), the interest on your line of credit will be high. Something to keep in mind if you’re considering a line of credit is that most of them have variable interest rates, meaning that the interest rate can increase or decrease over time, sometimes within a set high- and low-limit.
Taking a personal loan
According to The United States Census, the Median household income was $61,372 in 2017. Even though this is at an all-time high, it can still be hard for some adults to save enough money for large purchases when they fall in this income category. Thus, the existence of personal loans. With a personal loan, you get a lump sum of money for which you begin paying interest immediately. Most Americans have experience with car loans and mortgage loans, to name two. The biggest difference with a personal loan is that the loan itself is not secured, which means there is nothing held in collateral against the loan in the event you stop paying on it. Because of this, a personal loan will likely have a higher interest rate than a secured loan.
Pros and cons of getting a personal loan
With loans, you generally pay regular payments with interest over a period of time until the loan is repaid. Unlike lines of credit, with loans, you start accruing interest as soon as you receive the money. The highlight? Loans usually have fixed interest rates, which means your rate will stay the same during the life of the loan. Also, your payback amount will stay the same, month after month.
Find out which one’s right for you
Generally speaking, lines of credit are better for small, or unanticipated debt, whereas loans are better for long-term debt, such as major purchases, life events (wedding aren’t cheap!) and debt consolidation. Before making a decision, remember to ask yourself:
Is my credit score excellent, good, fair, or poor? Click here to find out.
- What’s the interest rate and how long is it going to take me to pay this off?
- Do I know exactly how much money I need to borrow, or could it vary?
- How will this affect my credit score?
If you’re trying to determine whether a line of credit or a loan is best for you and your current situation, consider all of the facts. It’s not just your credit score, it’s your financial future.
LendingPoint is a personal loan provider specializing in NearPrime consumers. Typically, NearPrime consumers are people with credit scores in the 600s. If this is you, we’d love to talk to you about how we might be able to help you meet your financial goals. We offer loans from $2,000 to $25,000 with terms from 24 to 48 months, all with fixed payments and simple interest.