Personal loans and lines of credit are both viable options when you need to borrow money. However, they are distinct options with several notable differences. We can help you decide which one might be the best choice for your situation.
What is a Personal Loan?
A personal loan is a fixed amount of money that you receive all at once. At Connexus, you can choose to borrow anywhere from $2,500 to $20,000. Personal loans also have fixed rates and terms, which means you pay the same amount every month for a certain number of months.
There are two types of personal loans: secured and unsecured. A secured loan is where you offer up collateral. This allows you to get a lower interest rate. Though, if you’re not able to pay off your secured loan, you could lose your collateral. Unsecured loans require no collateral and therefore have slightly higher rates than secured loans.
What is a Personal Line of Credit?
A personal line of credit is similar to a credit card in that it offers a borrowing limit (between $3,000 and $25,000) that you can use for making ongoing purchases. This revolving credit doesn’t require collateral. Rather than swiping a card, you access your line of credit by getting an advance from your lender.
As with a credit card, you can borrow money up to a certain limit, pay it off gradually and resume borrowing as needed. Your monthly payment amount depends on the total balance you owe. Minimum payments are usually a small percentage of the balance owed, such as 2%.
While interest rates tend to be higher for personal lines of credit than personal loans, the interest you pay only applies to the amount you borrow, not the entire credit limit.
When to Choose a Personal Loan
If you know exactly how much money you need to borrow for a large, upfront expense, a personal loan is probably the right choice. Since you don’t need extra flexibility to borrow money gradually, you could end up saving money compared to a personal line of credit thanks to the lower interest rate.
The most common uses for personal loans include:
- Paying down high-interest credit card debt
- Financing a large purchase
- Funding a wedding or vacation
- Paying for the expenses of a new baby
When to Choose a Personal Line of Credit
If you have unexpected expenses, need money on a recurring basis, or have an unpredictable source of income, a personal line of credit may be right for you. It’s an excellent way to borrow money when you’re not exactly sure how much money you’re going to need at one time.
Personal lines of credit are often used for the following:
- Unexpected medical bills
- Providing peace of mind in financial emergencies
- Making a major car repair
- Supplementing irregular self-employment or commission-based income
Why Choose a Personal Loan or Line of Credit Over a Credit Card?
Credit cards are useful for making day-to-day purchases. However, if you can’t pay off the balance quickly, you could end up deep in debt.
Say you have a $5,000 car repair. You could put it on your credit card, but the average credit card has an interest rate of 17.67% APR1. If you can’t pay it off right away, you’ll end up paying far more than $5,000 in the long run. On the other hand, Connexus personal loans and lines of credit have much, much lower interest rates.
Plus, what if you have a $15,000 kitchen renovation in mind? Credit cards have relatively low borrowing limits that may not cover such a large expense. Personal loans and lines of credit let you borrow more to fund hefty purchases.
When you need to borrow money, think about what you need it for, how you’re going to use it, and how you want to make payments. That will help you ultimately decide whether to choose a personal loan or personal line of credit.