Personal Loan or Line of Credit: Which Option to Go For?

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People need loans for various purposes. These purposes could range from buying a new home or car to shopping clothes and other small items. The need for loan arises when people run short of the money they earn. When it comes to borrowing from bank, people have two main choices: to go for fixed term loan which is to be repaid to bank in the form of monthly installments or go for line of credit option in which the maximum amount you can borrow is already fixed which is called ‘credit limit’.

 line of credit

What is a Personal Loan?

A personal loan is a type of loan in which borrower borrows lump-sum amount from the bank. The borrower and bank agree to certain terms and conditions before signing an agreement. In this type of loan, borrower agrees to pay interest on the principal amount which is paid in the form of short payments over a period of time. The amount to be paid and the duration of loan is pre-fixed. This type of borrowing from bank gives sense of certainty to the borrower.

There are two types of personal loans: Secured and unsecured. Under secured loans, borrower usually keeps their assets as a security which banks can claim in the event of failure of payment of loan amount by the borrower. In unsecured loan, there are no securities as such and thus the interest rates tend to be higher since there are greater chances of non-payment.

What is a Line of Credit?

A line of credit is another type of loan from the bank in which amount to be paid is not fixed. However, the bank sets the maximum amount which can be borrowed which is also called ‘credit limit’. The borrower is issued with a credit card and he can withdraw any amount any number of times below or up to the fixed amount. Interest is paid on the amount that you borrow from the bank and not on entire credit limit. Thus, the interest rate becomes variable. This option offers flexibility to people who want to make on-going purchases.


Personal Loan and Lines of Credit 
: Characteristic

  • Personal loans are given at the time of signing the agreement while in case of lines of credit, the borrower withdraws specific amount he requires from the account opened by bank.

  1. People generally prefer term loan when they take major financial decisions. Lines of credit are generally preferred for making immediate purchases.

  2. People also go for line of credit when financing current assets or when opting for long-term investments.

  3. When borrowing term loan, interest has to be paid on the principal amount divided into monthly payments. In case of line of credit, interest is paid on the withdrawn amount.


Advantages of Personal Loan

A personal loan is usually amortized and has a definite end date. The loan amount and interest rate is fixed. Borrower does not have to worry about varying interest rates and is certain about the payments to be made each month to the bank.

 

Advantages of Line of Credit

Lines of credit are preferred because they offer flexibility to the borrower. They do not bind the borrower as to the time of repayment of borrowed amount. They also have the advantage of offering immediate service in times of need. The borrower can repay any amount to the bank as per his convenience and at any time. When people run short of funds at the time of shopping or anything, for that matter, they can easily avail services of Line of Credit.

Conclusion

Personal loans are great way to get money to fulfill your long-term dreams. But it goes without saying that lines of credit too, have their own set of benefits. In uncertain times, these loans come handy to the one who has applied for it. However, borrower needs to be sure of the amount he is withdrawing and the rate of interest charged on the amount. There are many banks and financial institutions which offer these types of loans and help borrowers realize their dreams. All you need is financial advice from an advisor to manage your borrowings successfully.

Source : http://moneytips.com/

Author Bio :

Carol Gibson is an expert author who regularly writes about Finance, personal finance and Technology. With her articles she wants to share her knowledge aboutMoney Tips. She welcomes any questions or comments you might have on her posts. 

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