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Line of Credit vs. Loan: Which Option is Right for Me?

LOS ANGELES - June 11, 2021 - (Newswire.com)

Lines of credit and loans both offer funds to cover expenses, but each comes with its own benefits. A line of credit is a revolving credit account that you can tap into when you need funds, up to a set limit and interest is paid only on money actually withdrawn. A traditional loan is a fixed amount of money that you borrow and then pay back with interest.

Lines of credit are great for instances where you want to draw on funds periodically or need to pay for a project and don't know exactly how much it'll cost. A loan can benefit you if you need a lump sum of money to pay for expenses. Let's dive deeper into lines of credit vs. loans so you can figure out which option is right for you.

Differences Between a Line of Credit and a Loan

Lines of credit can benefit people with incomes that fluctuate, as the availability of extra purchase power can help you get through the lean times. A line of credit is also great for projects like home repairs and expenses like travel, because you can withdraw money as needed. Loans can also be used to cover expenses and are a great option for one-time purchases and debt consolidation.

The main difference between a line of credit and a loan is that a credit line can be used repeatedly if you pay off the balances when due, while a loan gives you a lump sum of money all at once.

Pros and Cons of a Personal Line of Credit

A personal line of credit will have a set amount of money you can borrow and a period of time that it will be available for. You don't have to use all of it, and you'll only pay interest on the portion that you do use. Payment terms and interest rates vary by institution. Here are some pros and cons of getting a personal line of credit:

  • Pro: You only have to borrow the funds you need
  • Pro: There may be flexible repayment options
  • Pro: You only pay interest on what you use
  • Con: Interest rates can be high
  • Con: Having a high balance may lower your credit score

Pros and Cons of a Personal Loan

Many lenders will approve you for a personal loan based on your credit score and payment history. Interest rates can vary, but you may get approved for better rates if you have a higher FICO credit score. Payment terms can be short-term or last several years, depending on the loan type and amount. Here are some pros and cons of personal loans:

  • Pro: You can get the money in one lump sum
  • Pro: You may get quick approval
  • Pro: Making payments on time can improve your credit score
  • Con: Interest rates can be high if you have a low credit score
  • Con: Your credit score may go down when you first take out the loan

The Bottom Line

When deciding between a loan and line of credit, consider your financial situation and needs. If you need a lump sum of money right away, then a loan may be the right option for you. But if you want access to funds that you can withdraw from whenever you need cash, consider getting a line of credit. Make sure to do your research and compare loans or lines of credit available to you so that you choose the right borrowing option. No matter which route you choose to go, keep track of what you owe and try to make payments on time.

Notice: Information provided in this article is for information purposes only. Consult your financial advisor about your financial circumstances.




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