Difference Between a Line of Credit and Loan

If you need money to cover some expenses, you can take out a line of credit or loan. But what are the differences between these two financing options? While a loan provides you with a specific lump sum to borrow, with a line of credit, you get approved to borrow money up to a certain credit limit. 

Similar to a credit card, a line of credit allows you to draw cash when you need it. A loan differs in that you get all the money you borrow upfront in one amount. Here’s a closer look at how a personal line of credit and loan work and some differences between them. 

What is a personal line of credit?

A line of credit is a revolving credit account that you can draw money from up to a specified amount. With personal lines of credit, you’ll only pay interest on the amount you borrow. You can use a line of credit for any expense, whether you’re going on vacation or paying bills.

How a personal line of credit works

If you choose to apply for a line of credit, you can expect the following: 

Borrowing Amount

Once a lender looks at your credit history and considers your ability to repay, they may approve you for a certain borrowing limit. Upon approval, you’ll have the flexibility to borrow as much or as little as you’d like, up to that set limit.

Interest Rate (Annual Percentage Rate - APR)

With a personal line of credit, you’ll pay interest on the amount of money you withdraw, rather than your entire limit. If you get approved for $2,000, for example, but only take out $500, you’ll only be responsible for interest charges against the $500. 

Repayment Schedule and Loan Term Lengths

Your line of credit will have a recurring billing cycle. With each billing cycle you will receive a periodic statement outlining all transactions (draws, payments, interest charges, etc.) which took place during that billing period. The billing statement will provide a minimum payment due and a total balance due.

Fees

The fees you can expect to pay will depend on the amount you withdraw, the lender you use for your line of credit, and the state you live in. To see the line of credit fees applicable for Advance America’s lines of credit, enter your zip code here. 

Types of personal lines of credit

Here are a few examples of personal lines of credit:

• Personal line of credit
• Home Equity Line of Credit (HELOC)
• Unsecured line of credit
• Secured line of credit
• Business line of credit

What is a personal loan?

A loan is a sum of money that you can borrow from a lender and pay back with interest. Loans can either be unsecured or secured by an asset you’ll provide as collateral, like your car or house. The amount of money you can receive from a personal loan may depend on your creditworthiness and ability to repay

How a personal loan works

If you pursue a loan, keep these things in mind: 

Borrowing Amount

After a lender evaluates your credit, they may approve you for a loan with a fixed amount of money. Once approved, you’ll get this cash in one lump sum. 

Interest Rate (Annual Percentage Rate - APR)

A lender will decide on a fixed interest rate that’s based on your credit and income. You’ll need to pay interest charges on your entire loan amount. While good credit will increase your chances of landing a lower interest rate, you can still get approved for a personal loan with bad credit. 

Repayment Schedule and Loan Term Lengths

With a loan, you’ll receive a fixed loan term and repayment schedule after a lender approves you. While some loans are shorter and must be repaid within a few weeks or months, others can last for several years. The shorter your term is, the higher your monthly payments will be.

Fees

The lender and loan type you select will determine the fees you’ll have to pay. Some of the most common personal loan fees include application fees, origination fees, and late payment fees.

Types of personal loans

Here are a few examples of loans:

• Payday loans
• Installment loans
• Title loans
• Student loans
• Home equity loans

Differences between personal loans and lines of credit

While loans and lines of credit can both help you pay for things like car repairs or unexpected emergencies, they’re not created equal. The chart below highlights some of the distinct differences between personal loans and lines of credit.

Do I need good credit to get a loan or line of credit?

You don’t need good credit to get approved for a personal loan or line of credit. Many lenders, such as Advance America, have less strict credit score requirements. They’ll consider factors in addition to your credit score when deciding whether to approve you, like income, employment history, and current debts. This means you can still qualify for a loan or line of credit with poor or fair credit.

Can I get a loan or line of credit online?

You can easily get a loan or line of credit online. Since many lenders operate online, this means you can complete the application process, get approved, and receive the funds you need all from the comfort of your home. This makes personal loans and lines of credit more easily accessible for borrowers.

How to apply for a loan or line of credit

Here are the steps you can take to apply for a loan or line of credit:

1. Choose a lender and loan option

Do some research online to find a lender that offers rates and terms that work for you. Then, decide whether you want a personal loan or line of credit by considering your financial needs and preferences. For instance, if you want a flexible loan that allows you to draw on funds whenever needed, then a line of credit may be right for you.

2. Gather all necessary documents

Next, gather all documents and information you may need to fill out your application for a loan or line of credit. This may include a government issued ID, your bank account number, and proof of income.

3. Fill out and submit your application

Once you have all necessary documents ready, it’s time to fill out your application for a personal loan or line of credit. Provide all personal and financial details needed, and double check your application before submitting to ensure all the information you filled out is correct. Then, submit your application and wait for approval.

4. Receive your funds

If approved for a loan or line of credit, it won’t take long to receive the funds you need. Many lenders offer an instant approval decision and same-day funding, so you may get the cash as soon as the same day you apply or within 24 hours

How to choose between a personal loan vs. line of credit

If you know exactly how much money you need to pay for a certain expense, like new tires for your car, a loan may make sense. With a personal loan, you’ll be less likely to borrow more money than you need.

On the other hand, if you’re unsure of how much money you’ll need because you’d like to remodel your kitchen, for example, a line of credit is the way to go. It can give you the flexibility to borrow as much or as little as you want. A personal line of credit can also help you meet monthly bill payments on time, without worrying about when your paycheck will land. 

Advance America offers personal loans and lines of credit to meet your needs

Advance America is pleased to meet the needs of a variety of customers through a line of credit and a number of loan options. If you’re interested in a personal loan, you can choose to apply for a payday loan, title loan, or installment loan. 

No matter which loan you go with, you can enjoy an easy online application process and fast funding. In the event you prefer a line of credit, you can apply to get one for up to $3,000, depending on your credit and where you live.