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Personal loan or line of credit: Which is right for me?

Peter Warden
The Mortgage Reports editor

Personal loan or line of credit? It’s an easy choice

Which should you choose? A personal loan or line of credit? It’s not a difficult choice — once you know all about the two forms of borrowing.

But not many people know much (let alone all) about either. And many don’t even know personal lines of credit (PLOCs) exist.

So let’s lay out the information you need to choose the one that better suits your needs.

Check my rate for a personal loan up to $100k * (Sep 23rd, 2019)

*TheMortgageReports and/or our partners are currently unable to service the following states – MA, NV

How does a personal loan work?

A personal loan is exactly what you think it is. There are few such straightforward ways of borrowing.

To start with, you borrow a lump sum: you get all you want in one go. You then pay that down in equal monthly installments over a fixed period that you agree at the start. So you get to keep your payments affordable by deciding whether to repay the loan quickly or over a longer period — typically up to five years.

We said “equal monthly installments.” And that’s true for a fixed-rate loan. But, if you pick a variable-rate one, payments can go up and down in line wider interest rates. You might think, in the present economy, they’re more likely to go down.

Personal loans are “unsecured.” That just means that you’re not putting up a named asset (as you do with a secured loan, such as a mortgage or auto loan) that the lender can repossess if you default.

Everything you need to know about personal loans

What’s a personal line of credit?

Personal lines of credit are unsecured, too. You can get (if you’re an eligible homeowner) a secured version, but they’re called home equity lines of credit or HELOCs. And we’re not talking about HELOCs here.

Home equity loan vs line of credit (HELOC)

Personal lines of credit are different from personal loans because you don’t have to take all your borrowing in one lump sum when you open your account. And they share some characteristics with credit cards. So you:

  1. Get a credit limit up to which you can borrow
  2. Can borrow, pay back and reborrow as often as you like
  3. Pay interest only on your current balance
  4. May be able to tie your line of credit to your authorized overdraft facility

Also in a similar way to card issuers, lenders sometimes require you to make minimum payments. But there’s one key difference: For the same borrower, PLOCs typically have much lower interest rates than credit cards.

How do I get the money?

Your PLOC lender may provide you with a checkbook. And you can usually move funds into your checking account easily — either online or through telephone banking services.

Check my rate for a personal loan up to $100k * (Sep 23rd, 2019)

*TheMortgageReports and/or our partners are currently unable to service the following states – MA, NV

When’s a PLOC better?

PLOCs tend to be especially valuable for those whose incomes vary a lot. And that includes salespeople who rely on commissions, those who rely heavily on tips, seasonal workers, independent contractors, freelancers, those who work in the gig economy or who have zero-hours contracts … it’s a long list.

A PLOC provides them with a backstop. They can borrow during lean months and repay when things are going well.

PLOCs can also be helpful when you’re unsure how much you’ll need to borrow. Some people use them to fund the spread-out and unpredictable costs of a wedding or a home improvement project.

But one warning: PLOCs tend to have higher interest rates than personal loans. True, you can find them advertised on the internet with rates as low as 3.99% APR. But you’ll be lucky to get close to that. So only choose one if you’re going to take full advantage of its superior borrowing-and-repaying flexibility.

When’s a personal loan better?

Personal loans are better when you don’t need that flexibility. Or when you’re so self-disciplined that you can save the money you borrow for the rainy days that are so common among those with highly variable incomes.

Why are they better? Well, they:

  1. Are usually a bit cheaper — Remember those lower interest rates
  2. Have predictable monthly payments — That makes budgeting easy
  3. Have a fixed end date — You know from Day 1 when you’ll be debt-free
  4. Don’t let you max out your facility — Once you’ve borrowed, you’ve borrowed. You can’t keep going back for more, as you can with a PLOC or credit card
  5. Are easier to find — Once you start looking, you’ll probably find banks offering PLOCs. But they’re much less common than personal loans so there’s less competition between lenders

How to get a personal loan: Step-by-step guide

Personal loan or line of credit? Some similarities

Personal loans and PLOCs are close cousins. So they have plenty in common.

For example, both typically have much lower interest rates than credit cards. They’re often more expensive than secured loans, such as home equity loans and HELOCs, which are second mortgages. But then, you’re not putting your home on the line if you default.

And, as with almost all types of borrowing, you’re likely to pay the least if you have great credit. When you apply for a personal loan or PLOC, the lender has little to go on when making a decision about whether to approve you and how high a rate to charge you. So they focus on your credit score.

Unsecured personal loan: What is it and can I get one?

Quick!

Finally, you’re likely to get your hands on your money (or your ability to access money) quickly with both. With a personal loan, you might even get it on the same business day you put in your application — or perhaps the following one.

Sometimes, it can take a week — or more for complicated applications for big sums.

Many lenders cap their PLOCs at $100,000. Personal loan borrowers usually want between $1,000 and $50,000. However, it’s possible to find personal loans as high as $500,000.

Choosing a personal loan or line of credit

So now you know. Chances are you’ve already worked out which will suit you better, a personal loan or line of credit.

But, to sum up, PLOCs are great for those who need the flexibility that comes with being able to borrow, repay and borrow again. But most borrowers who get little value from that may find personal loans the better bet.

Find out now how good a deal you can get by requesting offers from multiple lenders.

Check my eligibility for a personal loan up to $100k * (Sep 23rd, 2019)

*TheMortgageReports and/or our partners are currently unable to service the following states – MA, NV