How Taking a Loan Differs From Line Of Credit?

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Personal Loan vs. Line of Credit

Personal loans are sometimes called signature loans. They get this name due to the fact that if you qualify, you can receive the loan with just your signature. Because the loan is unsecured, you don’t have to put up any assets or collateral, such as a home or vehicle, to secure financing.

Lines of credit, on the other hand, behave like credit card accounts. You can borrow, pay down your balance and access your available credit line again and again. Like a personal loan, you may be able to qualify for an unsecured personal line of credit with just your signature. However, if you secure your line of credit with an asset, you may receive a better interest rate.

Types of LOC

​1.Security LOCs:

There are two types of LOC under the security parameter – Secured LOC and Unsecured LOC. Collateral backs the secured LOC, which can be in the form of property mortgage, life insurance policies, fixed deposits or other liquid assets. In the case of unsecured LOC, the loan is not backed by any collateral and mainly relies on the credit history of the borrower and repaying capacity upon which the amount is sanctioned.

 2. Facility LOCs:

Facility LOCs are of two kinds – Personal LOC and Business LOC. The difference lies in the utility of these sanctioned amounts. It can be either for business or for some personal use.

Features of LOC

  1. LOC enables a customer to access the loan amount as long as s/he adheres to the sanctioned limit.
  2. The borrower can break up the amount in chunks and take the money as per requirement. It is not an absolute necessity to take the entire capital.
  3. The feature of borrowing and instantly repaying is perhaps the best option as it keeps the debt and recurring charges at bay.
  4. Once the borrower withdraws a certain amount of capital, the limit comes down from the total amount, which reduces the credit limit automatically. It can be refuelled upon repayment.
  5. You pay the interest only on the amount that you borrow and not the entire capital.
  6. The interest rate in Line of Credit ranges between 10 per cent – 15 per cent depending upon the creditworthiness of the borrower.

Ways of borrowing while taking a loan differs from Line Of Credit

1. Loan and line of credit are two different ways of borrowing from a lender for personal or business use.

2. A loan is a lump sum amount of money that is for one time use whereas a line of credit is an access to a preset amount of money that can be borrowed from multiple times.

3. Interest is charged on the loan immediately irrespective of when the money is used whereas in line of credit, interest is charged once money is borrowed.

4. Loans are for specific purpose whereas a line of credit can be used for any purpose.

5. The interest rate on loans is generally lower than those on a line of credit.

Difference between Loans and Line of Credit

Loan vs. Line of Credit
LoanLine of Credit
The borrower only has access to the amount loaned in one lump sum.A line of credit is a preset borrowing limit that can be used at any time, paid back, and borrowed again.
A loan is based on the borrower’s need, such as purchasing a car or a home.Credit lines can be used for any purpose.
On average, closing costs (if any) are higher for loans than for lines of credit.Credit lines tend to have higher interest rates than loans.
Interest accrues on the full loan amount right away.Interest accrues only when funds are accessed.

Personal Loan Vs Line of Credit: Comparison

Qualifying for a line of Credit requires a higher credit score compared to that for a personal loan. If you obtain a loan that is too little to cover costs, you may end up borrowing again. This means you may face hurdles while applying for a new loan, which could have a negative impact on your credit score. A line of credit can also affect your score if you have high borrowing, as in the case of a high-interest credit card balance.

While both personal loan and line of credit provide you with the required capital, both options have different uses. A line of credit is flexible and easy to use compared to a personal loan that is ideal for big-ticket purchases. If you are certain about your requirements in terms of the amount, purpose and repayment capacity, then a loan would be a better option.

A line of credit helps compensate a temporary cash shortage. he concluded that in the present crisis, a line of credit would be the ideal choice as it gives you the flexibility to use the funds as and when the need arises (and pay only for what you use and when) without having to apply for multiple loans.

We are living in unprecedented times and while the government is doing its part to revive the economy, as evident from the Rs 20 lakh-crore ($266 billion) package announced on May 12, you should do yours by taking charge of your financial situation and securing your future. A personal loan or a line of credit will help you tide over a financial crisis. But before you opt for one or the other, ask yourself if you really need to borrow. Any loan should be taken only as a last resort. This is the first rule of a healthy financial plan.