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Using a Line of Credit vs. a Personal Loan: Which is Right for You?

in Loans
Using a Line of Credit vs. a Personal Loan: Which is Right for You?

If you are in a position that you want to make an expensive purchase or need to consolidate debt, you essentially have two options: open a credit card and use it to make a purchase, or apply for a loan. Both of these options can help you to achieve your goal quickly, but there are a few reasons why you might choose one over the other.

What is a personal loan?

Personal loans allow you to borrow money. Whether that is to consolidate debt, emergency cash flow, or home improvements. You can obtain a personal loan from a bank, a credit union, or an online lender. Each personal loan has different terms and requirements that are based on the lender as well as your credit profile.

The main difference between a personal loan and an auto or mortgage loan is that these types of loans are secured with the property you are obtaining, while a personal loan is generally unsecured. This does not come without a trade-off, as personal loans generally have higher interest and larger initial credit requirements to be accepted.

What is a line of credit?

Credit cards are also known as a line of credit. They can be used to purchase goods and services online as well as in-person where accepted. Generally speaking, credit cards give the user one month to pay the balance or interest will be charged. If the minimum payment (usually around 10% of the balance) is not paid, a late fee will be added to the bill. Credit cards carry interest rates anywhere from 15-25%, with an average of 19% in the United States.

Which is right for you?

Both credit cards and personal loans can either make or break your credit score. If you make your payments on time, then you will raise your score. If you do not pay either one, then you can damage your credit score as well.

Personal loans are generally better for expenses that are very large and will take longer than a few months to pay off. Due to the high-interest rate nature of credit cards, they are generally reserved for smaller expenses that can be paid off a bit more quickly.

The interest rate of a personal loan will depend on your credit profile and credit score. That means personal loans are not attainable for everyone. Additionally, personal loans are a one time borrow, as compared to a line of credit, which can be continuously used and built upon.

If you are looking to pay a smaller minimum payment each month, then a line of credit may be a better option. This is because the minimum payment on a credit card is generally lower than on a personal loan which has a fixed monthly payment.

One positive aspect of credit cards is their ability to deliver quickly. If you already have a credit card, you can use it immediately. The process for a personal loan is a bit longer, but with the modern age the process is becoming quicker and some lenders offer services fully online. Credit cards also often are easier to obtain than personal loans for those who have less than optimal credit.

Bottom line

If you are still not sure which option is best for you, then ask yourself some questions:

How much do you need to borrow?

If it is a small amount for emergency bills use a line of credit if it is for a larger project, choose a personal loan.

Will it take longer than a few months to pay off your debt?

If the answer is yes, then a personal loan might save you money as compared to a line of credit.

Do you have amazing credit?

For those with excellent credit, you have more options. Taking out a personal loan may give you a better interest rate, but you might actually qualify for a credit card with 0% APR for a certain amount of time. If you have poor credit you need to see what personal loan interest rates you qualify for and if they are lower than your line of credit options.

Are you looking to borrow cash?

Credit cards will only supply cash with a cash advance which generally comes with higher fees and larger interest rates.

Do you have issues with overspending?

If you can see yourself having trouble with a credit card, then you may get yourself into a cycle of debt.

Borrowing money is not one size fits all, as long as you examine your needs and weigh your options, you should be able to make the right decision for you.

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