Sometimes, undesirable events such as accidents can occur unexpectedly, leaving you worse off financially if you lack sufficient financial cushion. However, you can still regain your footing using a personal line of credit or a personal loan. Both are two vastly different sources of financing as explained below.
Personal Line of Credit Explained
A personal line of credit works in a similar fashion as a credit card, meaning that the bank or credit institution will fix a limit to the credit line, allowing you to borrow money anytime you need it at a variable interest rate. However, it is less costly compared to a credit card advance, doesn’t require collateral unlike an home equity line of credit and is flexible in comparison with a personal loan. However, it is recommended to secure your line of credit with your assets in order to benefit from a higher credit limit and lower interest rates.
A personal line of credit also differs from a personal loan in that it is reusable. This means that once your approves it, you can reuse it any time without having to make fresh applications, provided you satisfy all terms laid out, such as making timely interest payments. The amount of credit limit that you are entitled to depends on your banker and your credit score. Since a personal line of credit is mostly unsecured, they are mostly offered to consumers with good credit history.
Personal Loans Explained
A personal loan refers to a typical loan that you can obtain from a lender or financial institutions, and involves a lump sum disbursement, which you will have to repay via regular monthly instalments. They are recommended if you wish to make a single large purchase at a variable or fixed interest rate. However, most personal loans are repaid at fixed interest rates, with the monthly payments remaining the same during the tenure of the loan.
Personal loans can be secured or unsecured. However, while unsecured loans are approved faster, you will repay them at a higher interest rates. Secured loans are more cheaper as lenders consider you a lower risk borrower due to the fact that you have pledged your valuable asset as a collateral to the loan. As for the repayment options, you can choose whether to pay the loan on a weekly, semi-monthly, bi-weekly or monthly basis.
Differences Between Personal Loan and Personal Line of Credit
The key difference between the two credit facilities involves how funds are disbursed. If you get approved for a personal loan, you will be given the lump sum amount and interest will start accruing on the borrowed funds right away. However, if approved for a personal line of credit, you will be able to borrow up to a certain limit immediately, though you won’t receive a huge check immediately or have funds wired to your account on the spot. Interest will only start accruing once you buy something against the credit line.
Another key difference is purpose of the credit. Most personal loans are granted for a specific purpose. For example, a student loan is used for financing higher education, while a car loan is used for purchasing a car. However, personal line of credit have no specific purpose, hence you can buy an item without seeking your lender’s approval.
