Loan Lister

There are a few major differences between a personal loan and a personal line of credit (LOC).  It is important to know these distinctions if you are in the process of looking for loan options.

1. Fund access – A personal loan comes as a single lump sum payment.  An LOC, however, has a little more flexibility.  Think of an LOC as a credit card disguised as a checking account. Instead of a credit card, you receive checks to access your credit limit.
2. Payment options – Most personal loans require that you pay a fixed monthly payment consisting of both interest and principal.  LOCs are similar to credit cards in their payment calculations.  The amount of principal paid depends on what is drawn.  For example, some LOC principal payments are either $25 or 1/120th the amount of principal, depending on which is greater.
3. Interest rate – Personal loans usually have fixed rates to go along with their fixed monthly payments.  LOC’s, on the other hand, are the opposite.  They often have a variable interest rate, which can affect the monthly payments.

Personal loans are great if you need a lump sum or a loan with a fixed payment, making it is easier to budget and plan around.  If you want more flexibility, the LOC would be more suitable.

A line of credit is a personal loan extended to a person based on their credit score and income.  These types of loans can be secured (collateral) or unsecured.  Like any type of loan, it can come in handy or become a quagmire of debt depending on how it is used.  It should be used either for emergency use only or as a type of investment tool.  People often end up into trouble by forgetting three things:

1. The original plan:  Most people get a loan for a specific purpose.  Once they open the LOC, people tend to forget or alter their original plans.
2. The LOC is a loan: Over time, people can forget the LOC is a loan and not a source of income. They can come to rely on it to pay for their monthly expenses. The more the LOC is used, the higher the monthly payment.  This tends to be a downward spiral, especially in combination with #3.
3. The LOC is limited: It is limited in funds that have to be paid back.  Most people hit bottom.

If you are looking into opening a personal line of credit, think about the consequences, come up with a plan and stick to it.