The majority of us manage to make a decent living. But sometimes you can face unexpected financial expense you need to deal with. If it is hard to make a choice between these two variants, this article will help you find the right answer and choose what is better for you.
Both options provide you extra cash which is needed urgently. Each of these options is a type of credit and both of them have many similarities, at least at first sight.
In reality, lines of credit and personal loans function quite differently. That’s why deciding between the two is mostly a personal choice, although how you aim to use this money may also influence your decision.
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The Notion of a Personal Loan
Most people tend to shorten the notion of a personal loan to just one word – “loan”. Personal loans are given for a particular amount of money with a certain repayment period and certain interest rate. They represent a form of repayment or installment credit because you need to repay the loan in certain amounts over time, which are called installments.
The personal loan is considered to be fully repaid when the final payment was posted. After that, the loan debtor’s balance comes back to zero.
Personal Loan: Pros and Cons
If it’s a one-time financial expense, such as an emergency car refit or home improvement, then taking a personal loan may be your perfect solution. You can also consolidate several credit card bills into one payment using a personal loan. Such loans usually come with a lower interest rate in comparison with credit cards, except for some payday loans.
You can make significant savings after some time if you consolidate your credit card payments. Another great advantage of personal loans is that they have fixed payments and interest rates, and therefore are of great help with budgeting.
If the loan debtor maintains regular repayments, his or her balance for personal loans slowly decreases until it reaches zero.
The main disadvantage of personal loans is that you can receive money only once. While the first loan is not repaid yet, you can’t apply for a new one. You can apply for the second loan all over again after your first loan is fully repaid.
Another downside of a personal loan is that the borrower is charged with the interest from the day he or she is given the loan, even if the debtor doesn’t use this money at once.
Moreover, the loan debtor has to pay off the interest for the full term of the loan, even if you’ve already spent the money, which can hit you in the pocket.
The Notion of a Line of Credit
You do not need to look through the best personal finance books looking for the term explanation, as a line of credit functions more like a credit card than like an actual loan. It represents a type of revolving credit. Usually, lenders set certain amounts of money available for loan debtors.
Then borrowers can either withdraw all money at once or make several withdrawals until the limit of the line of credit.
Lines of Credit: Pros and Cons
The biggest advantage of the line of credit is that the period of repayment does not begin until the loan debtor makes withdrawals. Another advantage of the line of credit is that both repayment process and withdrawal are flexible.
A lot of people consider lines of credit very useful for covering long-term projects like physical therapy or remodeling. However, this type of credit also has some downsides.
A line of credit has monthly payments and interest rates that depend on how much the debtor has borrowed as well as on market conditions.
It’s up to you which type of credit to choose. In general, it’s better to apply for personal loans for one-time needs, while a line of credit if better for funding on an ongoing basis.