The Differences Between Personal Loans and Personal Lines of Credit

Personal Loans and Personal Lines of Credit are both smart, affordable options when you need to borrow money. However, they are also distinct loan products with several notable differences. In this blog, we’ll discuss the differences and help you decide which is the best borrowing choice for your financial situation.

What is a Personal Loan?

A personal loan is a fixed amount of money that you receive all at once. At Connexus, we offer loans starting at $1,000 all the way up to $50,000. Personal loans also have fixed interest rates and term lengths, which means you pay the same amount every month for a set number of months until the loan is paid in full.

There are two types of personal loans: secured and unsecured. When you take a secured loan, you offer collateral. The collateral allows you to get a lower interest rate; however, if you’re not able to pay off your secured loan, you could lose that 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 depending on the type of line) that you can use for ongoing expenses or 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.

Like with a credit card, a line of credit allows you to 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 once.

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 16.26% 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 those larger expenses.

When you need to borrow money, start by considering how much you will need, 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 a personal line of credit. Then, when you’re ready, visit our Personal Loans and Lines of Credit page to learn more about how these affordable, versatile borrowing options can help you.

1 Rate is accurate as of 04/04/2022. Source: