posted on 2020-05-19 04:48:15 by Admin
You have been a responsible saver and utilizes your credits well. But needs extra funds to meet immediate requirements? Any unforeseen circumstance can lead to this kind of uncertainty in finances. It is imperative to manage your funds well. For personal use, there are various options like loans, credit cards, a line of credit, etc. Thus in the market, there are multiple credit line products, and you must choose one which best satisfies your financial needs. Foremost, it is important to understand their unique features before applying for them. So, what is the difference between personal loans and Line of Credit? Let’s figure out which is the best option for you.
There are some essential differences between Personal Loans and Line of Credit which will help you decide which option is better for you.
Loan Amount
In personal Loan, you will get the whole loan amount in one go. It will remain with you whether utilized or not. Also, you have to pay monthly EMI based on the loan amount borrowed.
Whereas, in line of credit, you have a limit of borrowing money. The limit is decided by banks as per the customer credit-worthiness. You pay the interest rate as per the funds you will use.
Interest Rates
The difference between a personal loan and a personal line of credit lies in the interest rate and its type. In personal loans, the interest rate is fixed and generally low. Whereas for the personal line of credit, the interest rate is flexible depending on the prevalent loan rate. Also, the interest rate is higher than personal loans.
Efficiency of Borrowing Money
If you are not sure about your money needs then you can use a line of credit. You can withdraw money whenever you need. Moreover, you have to pay interest for that amount only. Whereas in a personal loan, you will get money in lump-sum and need to pay fixed interest until the tenure of the loan repayment period.
Repayment Period
The repayment period for personal loans is fixed, which is generally 1-5 years. Whereas, for the line of credit, the repayment period is flexible, as it will depend on the credits and the financial institutional policies.
Secured or Unsecured
The line of credit can be secured and unsecured. For the secured LOC, there is a low-interest rate because you have to put up collateral to get the credits. Whereas for an unsecured LOC, you do not need to put any collateral. On the other hand, personal loans are unsecured loans, where you can get the funds without putting any assets to secure the loan.
During COVID, many banks are offering emergency lines of credit to the current account holders. Also, banks are offering COVID-19 personal loans at low-interest rates.
Line of credit is a flexible option that helps you to access the funds immediately. Also, it offers flexibility in the interest rate and repayment period. The other features for a personal line of credit include.
● A personal line of credit has a low-interest rate as compared to credit cards if it is a secured loan.
● You have to pay an interest rate only for the funds you will use. As soon as you return the money, you will need to pay interest only on the outstanding amount.
● You can use funds in a line of credit without applying for a new loan again and again.
● Line of credit is best for short term use, you can use them in emergencies and can easily pay with time.
● You can use a line of credit unto your credit limit. Also, once you pay it back, the limit replenishes and you can use the credits again.
The steps to apply for LOC are easy. First, fill the application for a line of credit in your bank and fill the necessary details. Once the lender receives your application, it will set your credit limit based on your credit history. Once it is set, you can withdraw upto that specific limit. Use, return, and withdraw again if required.
Read: How to Manage your finances during COVID-19?
Like Line of Credit, Personal loans are also the best way to fulfill your financial needs. They are best when you are sure about the exact funds you required and how you will use them. The features of personal loan are
● An applicant has to pay a fixed interest rate over the repayment tenure.
● The credit limit is higher in case of personal loan and the repayment period is also long.
Both options are beneficial for credit needs, it depends on what is your credit requirement. The line of credit is better when you need only small credit for a time being. For example, you need INR 10,000 for a while, then you can opt for a line of credit. This way you will utilize the money that you need for now. Remember, you need ahigh credit scorefor this type of credit.
Whereas when your credit needs are fixed, let’s say you need INR 50,000 for a wedding. Then you can apply for a loan.. By availing a personal loan, you will get the benefit of low-interest rate and the long repayment period.
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Personal Line of Credit |
When exact credit need is not known |
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Credit need is spread over some time |
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High Credit Score |
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Best for those who face short term liquidity needs and can pay in short duration. |
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Personal Loan |
When you know the exact amount you need |
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When the fund needs to be used in one go |
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Needs money for debt consolidation / Loan Transfer |
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