Banks offer a variety of products to give you access to cash. But is every borrowing option the same? If you’re weighing the alternatives, you may struggle with the choice between a loan and line of credit. Only you can decide what’s best for you, but there are some factors to consider. Those include your personal spending habits and your plans for the extra source of funding.
What’s the Difference?
Once you’re approved for a line of credit, you don’t have to use it right away. The credit line is available for you to draw from as you need, but you’ll have to make regular payments on any balance. It’s considered a revolving form of credit, where you get the available credit back after you’ve made the agreed upon payments. Some lines of credit only require that you pay the interest on any outstanding balance.
A loan typically comes as cash in one lump sum. You pay it off in fixed installments. Once it’s paid off, it’s paid off. You cannot “reuse” the credit as you do with a credit line. Your payments go towards the amount you received when the loan was approved.
Your bank can change the interest rate on your credit line at any time, and your minimum payments may go up as a result. On the other hand, with an installment loan, you may negotiate a fixed rate that does not change until the term is up. Both options may be secured or unsecured. If you offer security, you may have access to more credit or a bigger loan.
What’s Your Plan?
So, how do you decide between the two? It depends in part on your reason for getting the credit line or loan. Usually, a loan is to pay for a specific large expenses, like a renovation or to consolidate other debt. A credit line is similar to a credit card, in that it may help you to manage your cash flow when you use it appropriately.
Both must be repaid. Even the credit line, which has minimum payments, is an outstanding liability on your personal balance sheet.
Choosing one or the other can come down to your personal spending habits. Because the credit line is a revolving source of credit, you can take on more debt than you can handle. With a loan, your debt is always getting lower, as long as you continue to make the payments.
On the flipside, a credit line can be an excellent way to manage your cash flow. If you have irregular income, unexpected expenses, or want some leeway in your spending from month-to-month, a credit line may be a good choice. Because you only have to make payments on any amount you use, you may have more flexibility to pay off the balance or make only the minimum payment.
Before you decide, think through how you plan to use the funds. Try to envision what the repayment schedule will look like, and whether you can afford it. When you finalize an agreement with your lender, understand the terms and conditions so you can preserve your financial future.
What Loan Options Are Out There?
If you’re ready to research your borrowing options, check out personal loan rates on Ratesupermarket. You can find lenders willing to work with you today.