Personal Lines of Credit vs. Personal Loans

Whether you’re hoping to take a big vacation, consolidate high-interest debt or plan the wedding of your dreams, taking out a personal loan or a personal line of credit could be a good way to pay for it. While both are popular choices for borrowers who want to access funds without turning to a credit card, there are some key differences between personal loans and credit lines. Read on to learn more!

The Basics

When you take out a personal loan, you receive a specific sum of money from a credit union, bank or other lender, to use how you wish. The terms of your loan will specify your interest rate and loan repayment timeline, and lay out a schedule of fixed payments which you need to make every month. (Click here to learn more about personal loans from HUECU).

A personal line of credit, on the other hand, is more like a credit card. The lender sets a pre-determined limit and you can borrow as much money as you need, whenever you like, up to that limit. Personal lines of credit almost always come with a variable interest rate, and repayment terms will differ depending on your specific agreement with the lender.

What Are They Used for?

A personal loan is commonly used to cover a one-time expense. You might be looking to take a vacation, pay for a wedding, or buy a pricey piece of sports equipment. Many people also use a personal loan to pay off credit card or student loan debt; especially if they can get a personal loan interest rate that’s lower than what they are paying on existing debt.

A personal line of credit is most useful when you are unsure how much extra cash you’ll need and how often. A credit line is sometimes used as protection from overdraft or if you’re experiencing irregular income. Some people also like to have a personal line of credit open in preparation for emergencies.

The Question of Risk

Both personal loans and personal lines of credit care unsecured, which means you don’t need to designate an asset—such as your house or car—to be collateral for the lender. This means less risk to you as a borrower, but more risk to the lender. That’s why a personal line of credit will usually have a higher interest rate than a home equity line of credit (HELOC).

On the other hand, both personal lines of credit and personal loans, such as an HUECU personal loan, usually have interest rates which are much lower than what you’d get with a credit card or payday loan; particularly if you have a good credit score and credit history. 

Comparing Interest Rates

Your interest rate for either a personal loan or a personal line of credit depends on your credit score, credit history, and other details like your occupation and where you live. Personal loan interest rates start around 4.49% and go up to around 35.99%, and the interest rate on a personal line of credit is similar. However, keep in mind that a personal line of credit always comes with a variable interest rate, which means your rate will change based on repayment timing and market conditions. If you want a fixed interest rate and standard monthly repayment terms, choose a personal loan instead.

How Repayment Works

Paying back a personal loan is fairly simple. The repayment terms will be baked into the original loan agreement, so as a borrower you know exactly how much you owe and can expect to pay a set fee every month.

With a personal line of credit, it’s a little more complicated. Most lines of credit specify a period in which you can borrow, after which you are required to start making repayments—although it’s also usually OK to repay funds before the official repayment period begins. Some lenders may ask for a one-time balloon payment of the full balance borrowed, while others require monthly payments.

As with any loan, responsible borrowing is vital. As part of the underwriting process, lenders will review your credit application and finances to ensure that you can make the monthly payment. However, lenders aren’t aware of your full financial picture. As HUECU members, you have access to free financial counseling through GreenPath Financial Wellness. GreenPath counselors can review your budget thoroughly and help you determine what loan amount may be best for your specific situation.

To learn more about personal loans, check out HUECU.org