Comparing Personal Loan vs Personal Line of Credit

Have you ever been in a situation where you are in urgent need of money, but do not have it at your disposal. For a moment you consider raising it from a friend or family member but then remember the wise saying “Neither a borrower or lender by, for loans oft lose both itself and the friend”. Today, fortunately there are several ways to raise money during a time of crises. You could take a gold loan, a loan against securities, a personal loan or avail a personal line of credit. In this article we compare the latter two - the personal loan versus a personal line of credit.

A personal loan is a lump sum loan given to a borrower without any corresponding collateral. The borrower can use it for any purpose as s/he sees fit. The EMI is fixed at the time of the loan agreement. The borrower has to pay the fixed EMI by an agreed date every month till the loan and accrued interest is cleared. The number of installments is clear to the borrower at the time of signing the loan agreement. A reputed lender will provide a clear schedule of repayment, clearly indicating the interest component you will be paying. A personal loan works well when you need a lumpsum amount at one go and you are clear about the amount required. Personal loans are often used to finance furnishing and gadgets for the house, or to make the down payment while buying property. Sometimes it is also used to finance holidays, pay for wedding related expenditure, or credit card outstanding payments.

A personal line of credit is much like an overdraft facility. The limit of borrowing is set by the lender. You can withdraw the entire amount if you require, or part of the amount. You can withdraw the amount in several installments over a period of time as per the specifics of the personal line of credit loan agreement. Interest will only be charged on the amount withdrawn. A personal line of credit works well if you are uncertain of the exact amount you need, or if you have some expenditure spread out over a period of time. This is often the case when you renovate your home or if a family member is admitted to a hospital in an emergency.

Both personal loans and personal lines of credit have some features in common. You can avail of them only if the lender is convinced of your ability to repay. The lender will take into account your credit score – this usually needs to be 750 or more. They will also look at your stable income sources and bank accounts. Neither in the case of the personal loan nor in the case of the personal line of credit is the purpose for which it needs to be used, specified. You could pretty much use it for anything in the world!

There are however some differences in both. The personal loan provides the money in one single tranche. The personal line of credit facility allows you to withdraw as much as you need, as per the limits agreed upon, and as and when you need it. In the first case, interest is charged on the entire amount availed. In the case of the latter, interest is charged on the amount withdrawn and for the time period for which it is withdrawn. Thirdly, in the case of the personal loan, the interest rates and interest amounts are fixed at the time of agreement. In the case of the personal line of credit, the interest rates fluctuate as per the fluctuation of interest rates in the market over time. Thus, the interest component is extremely unclear in the case of a personal line of credit. However, while the interest rate for personal loans is generally higher than the rate of interest charged on credit card dues, it is generally comparatively lower in the case of a personal line of credit loan.

Apart from a personal line of credit, there are two other lines of credit that a borrower can avail. The first is a Business Line of Credit. The second is a Home Equity Line of Credit or HELOC. Business owners may find it useful to avail a business line of credit for business related expenditure. The approval process of this is usually easier than obtaining approvals for business loans. This however may vary from lender to lender. The HELOC is much like a mortgage where you offer your home as a security. The major advantage of this is that the interest rates are lower than unsecured personal loans. However, the major disadvantage is that you could lose your home if you are unable to pay the agreed installments on time.

Choosing between a personal loan or a personal loan of credit, will depend to a major extent on whether you require the money in a single lump sum or whether you require it spread over a period of time. It will also depend on your repayment ability. If you are not confident of the intervals or the amounts you can repay on a regular basis, a personal line of credit may work better for you. Keep in mind that any missed EMI results in a downgrade of your credit score, the prospects of future loans and the interest rates offered to you.