A loan is a type of debt that you take out against your assets or income. A line of credit allows you to spend money as it becomes available through an agreement with a lender. Both types of borrowing can be useful for different situations. However, there are some important differences between loans and lines of credit that should be considered before taking on either option.
What Is A Loan?
Loans have what’s called a non-revolving credit limit, which means the borrower only has access to the amount loaned once, and they subsequently make principal and interest payments until the debt is paid off.
When you apply for a loan, your lender will ask about how much money you need and whether you plan to use all of it right away. If not, he’ll also want to know if there are any contingencies attached to the loan — things such as when you must repay the funds, how long you’re allowed to take out the cash before repaying it back, and so forth.
What Is A Line Of Credit?
A line of credit allows you to take out cash advances against future payments that will be made by your bank account. The money comes from an existing savings account at your financial institution. Lines of credit are often offered in increments of several thousand if not hundreds of thousands dollars.
You pay interest only while using the funds, so they don’t accrue any fees until you actually spend them. This makes lines of credit ideal for covering large purchases such as furniture, appliances, cars and vacations.
Is It Easier To Get A Loan Or A Line Of Credit?
Loans are more predictable than lines of credit. With a loan, you know exactly what you’re borrowing and how much. A line of credit is more flexible when borrowing, but it might be trickier to budget with. It’s easier to borrow up to the limit with a line of credit. When you borrow, you repay the funds and then borrow again.
Loan Or Line Of Credit: Which Should I Choose?
When it comes comparing a loan or line of credit there are ways to determine which option might work best for you.
If you know how much money you would like to borrow, want to limit the amount of debt you are about to take on or are borrowing money for debt consolidation, a loan is probably the better choice.
If you don’t know how much you would like to borrow, your expenses may need to be spread out over years and have a credit score that is good or excellent with great payment history, a line of credit could be the best option.
