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.