Personal Line of Credit or Personal Loan: Which One Should You Choose?

August 13, 2021 by Spectrum Credit Union

Did you know? According to a biennial survey by the Federal Deposit Insurance Corp., 73% of U.S. households use a form of credit financing, such as a personal line of credit or personal loan.

Personal loans and personal lines of credit can be helpful borrowing tools, but one may suit your needs better than the other depending on how and when you plan to use the money. To clarify the distinctions between the two, we’re devoting this week’s blog to defining them, exploring how they work and highlighting some key features and considerations to keep in mind.

What is a personal line of credit and what is a personal loan?

A personal line of credit is a flexible form of revolving credit. It sets a maximum credit limit that you may tap as needed over a defined time period. The amounts you withdraw get subtracted from the overall credit limit, and you only pay interest on what you use.

A personal loan is usually an unsecured installment loan, which means no collateral is required. If approved, you receive an entire sum up front to use as you choose. That money must then be repaid with interest in regular installments that continue over the length of the repayment term.

When to consider a personal line of credit

A personal line of credit may make sense for situations where your money needs are ongoing and the amounts will vary. For instance, say you need access to funds to help pay for your child’s extra college costs that may be unpredictable. Because that recurring need could last for a number of years, you could tap a personal line of credit as those expenses occur over time — and only pay interest on the amount you borrow.

When to consider a personal loan

A personal loan may fit your needs in circumstances where you’re looking to fund a single purchase, cover a major expense or consolidate debt. For example, maybe you’ve done the math and see that a personal loan could help consolidate credit card or other debt at a much lower interest rate — saving you money. Or perhaps you have a major home repair with a fixed cost that you know up front. Because you plan to use the money right away, a personal loan may make sense for that one-time purpose.

The ins and outs of a personal line of credit

A personal line of credit comes with some built-in advantages and disadvantages that you’ll want to consider and compare with your needs.

Key benefits

  • Immediate liquidity as needed and over time
  • Good for ongoing funding needs with varying amounts
  • As you borrow and make payments, your available credit limit is restored accordingly

Important considerations

  • Not all lenders may offer them
  • There could be restrictions on how often you can tap the credit line
  • Tend to have variable interest rates that might fluctuate over the draw period

The ins and outs of a personal loan

A personal loan will also have several benefits and drawbacks that you’ll want to weigh and apply to your situation.

Key benefits

  • Regular, predictable payments that stay the same, which may make budget planning easier
  • Good for defined expenses with known costs
  • Tend to have fixed interest rates that won’t change over the life of the loan

Important considerations

  • Some lenders may charge loan application, origination or prepayment fees, along with interest
  • Adds to existing debt obligations, with required monthly payments
  • Potential to end up paying more in interest over the full loan term, even if you could have paid it off sooner

2 reasons to consider a personal line of credit

While they share some similarities, a personal line of credit and a personal loan meet financial goals in different ways. But when it comes to the most flexible option, a personal line of credit can adapt to changing needs. For example, a personal line of credit delivers:

Financial flexibility. Because it’s a revolving line of credit, you can tap as much or as little as you need — whenever you need it. That means you can draw small sums periodically, as opposed to one lump sum. And interest accrues only on what you use.

Multipurpose value. From a safety net for uncertain expenses to an available source of funds for an ongoing project, a personal line of credit gives you the ability to economically cover different amounts for different purposes — whenever you choose.

Evaluating your borrowing choices

When deciding on the best borrowing option for you, assess the amount of your funding needs and how long they may last. Then, rely on your credit union for answers and options. Not all lenders offer personal lines of credit, but Chevron FCU members can apply for a credit limit of up to $25,000 to access as they need — without using property or other assets as collateral. Learn more about this customized personal line of credit, which currently offers fixed rates starting as low as 7.90% APR.

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