When it comes to Personal Loans and Personal Lines of Credit, the options for how to use the funds are endless. While both offer flexibility in the different ways you can use them, there are certain instances where choosing a Personal Loan might be a better fit than a Personal Line of Credit and vice versa. Let’s explore these options and help determine which is the best choice for you and your budget.
Consider the Nature of the Expense
Personal Loans are distributed in one lump sum and are typically best for large, one-time expenses. Popular uses include back-to-school costs, paying off high-interest debt, and higher education expenses. In contrast, Personal Lines of Credit are revolving and operate similarly to a credit card – where you only pay on the amount you use for a specified term. This credit line is consistently available – once you pay off the money you have borrowed, the funds open up again.
A Personal Line of Credit can be optimal if you aren’t sure how much money you will need to borrow or for how long. Common examples of ways to use a Personal Line of Credit are supplementing irregular income, making home improvements, and having a backup for when unexpected expenses arise.
Evaluate the Terms and Your Budget
One way to remember the difference between a Personal Loan and a Personal Line of Credit is that a Personal Loan is fixed and a Line of Credit can change over the term. If you’re looking for a way to budget a certain amount each month, a Personal Loan ensures that you’ll pay a set amount each month for the life of the loan. With a Personal Line of Credit, the term will typically be longer and you’ll only pay on what you use. For example, if you are approved for a $10,000 credit line and only use $2,000 of the money, you will only need to make payments on the amount you’ve used. Alternatively, if you have a Personal Loan – you’ll make payments on the total amount of money borrowed, whether you’ve used the funds or not.
Qualifying for a Personal Loan vs. a Personal Line of Credit
Typically, receiving approval for a Personal Line of Credit is more challenging to obtain than a Personal Loan. Why? Due to the flexible nature of a Personal Line of Credit, having a good credit score is a significant factor in the decision to approve funding. On the other hand, a Personal Loan with its fixed term and amount borrowed – usually allows for easier approval.
Making the Decision
Why is it important to know the differences beyond the interest rate when it comes down to Personal Loans and Personal Lines of Credit? While often confused, these loan types have distinct differences that – if not chosen wisely, you could end up paying more. Factor in the end result of what you will be using the loan or line of credit for, how soon you’ll be able to pay it back, and take a close look at what your monthly budget is before you apply.
If you’re looking to fund the next step in your life, First Financial can help you achieve your financial goals. Talk to us today about your options and how to choose the right solution for you. Learn more about our Personal Loan and Line of Credit options here, and apply online 24/7!
*APR = Annual Percentage Rate. Actual rate will vary based on creditworthiness and loan term. Subject to credit approval. A First Financial Federal Credit Union membership is required to obtain a Personal Loan, and is open to anyone who lives, works, worships, volunteers or attends school in Monmouth or Ocean Counties. A $5 deposit in a base savings account is required for credit union membership prior to opening any other account/loan. Federally insured by NCUA.