Personal Loans vs. Lines of Credit

If you are looking to borrow money, there are many options. Individuals often look towards personal loans to fund what they need. A personal loan can be used when you know how much you need to borrow. 

A line of credit is another option. This type of loan is accessible to you immediately but does not have to accrue interest. This is a great option when you need flexibility to pay for something. Although they are both loans, they do have their differences. Review the sections below if you want to know their differences and how they could work for you.

What Are Personal Loans?

Personal loans are loans borrowed from a financial institution, such as a bank or credit union. Once borrowed, the borrower must pay back the loan in fixed monthly payments. These loans are typically paid off over two to five years. 

Whether you find personal loans online or at the bank, lenders will generally have a rate between 6 percent and 36 percent APR. While searching for a personal loan, you will find that most of the loans are unsecured. This means they are not backed by collateral.

Loans that are backed by collateral generally have lower interest rates, but you are at risk of losing that collateral. For instance, an auto loan is secured debt because if you do not pay off the loan, you risk getting your vehicle repossessed.

Taking out a personal loan is much cheaper than acquiring a credit card because the rates are lower. Personal loans also provide higher limits than credit cards. As with any loan, the interest rate percentage and the credit limit will be determined by credit score, income-to-debt ratio and your credit report.

What is a Line of Credit?

A line of credit is a way to access money quickly. This is money that borrowers take from a bank or credit union. You can take the money at the maximum amount for a certain amount of time. You will only have to pay interest when you begin to borrow. Furthermore, you receive access to the funds again when you pay it back. 

Another important detail is with a line of credit, you can borrow when you need to. Like personal loans, this kind of credit can be unsecured or secured. Certain credit lines may come with fees like an annual fee and certain limits on how much you can borrow. 

After qualifying for a line of credit loan, there will be a draw period. A draw period is the length of time you can take money from the account. Fortunately, there are certain lines of credit that can last for several years. There are many ways you can receive the money. For example, you can receive special checks, a card or have the money transferred into your checking account.

Differences Between Personal Loans and Lines of Credit

A personal loan and line of credit has several similarities and ways they can benefit borrowers. However, the way they both set up is quite distinct. For instance, they both accrue interest differently and the way funds are distributed to borrowers is distinct. A personal loan is given to a borrower completely upfront while a borrower may take money from lines of credit when needed.

Because of these similarities and differences, it is important to remain informed about each. Knowing which one is right for you will depend on many factors. Your financial needs will play a major role in your choices. Thus, being aware of the difference between personal loans and line of credit will make the decision-making process simpler.

Interest Rates

Both these types of loans will charge an interest rate. However, a line of credit loan will charge higher interest rates. This is because interest rates are almost exclusively decided by borrower income and his or her creditworthiness. What can make lines of credit more costly is also their variable interest rates. 

Personal loans can also come attached with a variable interest rate. However, most personal loans come with a fixed interest rate. There are also many factors that can influence the interest rate on a personal loan. This can include length of time the loan is borrowed, the amount borrowed and more. 


When a borrower must begin to repay these loan types have different rules as well. Whether it is a personal loan online or from the bank, they have a straightforward repayment system. The interest and balance are calculated and split into monthly payments. There is also a clear repayment date if monthly payments are made on time.

A line of credit does not have such a direct repayment schedule. Every lender will have their own method of payments. However, it has been described to be like making minimum payments on credit cards. The length of time to repay is also not fixed and may take longer. This may be due to the high interest rates on lines of credit.