There are various financial instruments available at your disposal when it comes to obtaining funds. Personal loans and a personal line of credit are two such modes of finance that you should keep in mind. While most people tend to consider both these funding options to be similar, don’t make the same mistake – there are various distinctions that you should know of before making such a general statement.
A personal loan is a service that provides borrowers with a large sum of money that is paid off through EMIs for a pre-specified tenure. These loans are usually used for a substantial one-time payment.
Meanwhile, a personal line of credit is a service extended by banks and financial institutions that provide individuals with the means to borrow up till a pre-defined limit. Borrowers can withdraw – and repay – certain sums of money up till a particular amount.
So, if you’re choosing between both these modes of funding, make sure that you are aware of the key differences.
Obtainment of funds
If you choose to opt for a personal loan, then the amount you’ll borrow is given to you upfront once your loan request is approved. The minimum and maximum amount of the loan you can take is dependent on several factors, such as your credit history, loan tenure, relationship with the borrower, and whether the loan you’re taking is secured or unsecured.
This is not the case with a personal line of credit. Instead of receiving the total amount in one go, you have the freedom to borrow money whenever you require. This borrowing capacity is capped to a certain limit that is predefined by the bank or lending institution that is providing you with this service.
The interest rate of a personal loan is dependent on the total loan amount, length of tenure, and your credit history. This interest rate can be either variable or fixed, although the latter is more common.
Personal lines of credit generally tend to have a higher rate of interest, as compared to a personal loan. This is because lenders that provide a line of credit operate at a higher risk level.
Mode of repayment
In personal loans, the system of paying back a loan amount is pretty rigid – you are required to pay a certain amount as EMI until the loan tenure ends. However, if you get your hands on any surplus funds and wish to pay off the loan amount before the tenure ends, then you’ll have to pay a penalty charge as well.
This is not the case with a personal line of credit. The funds borrowed from the credit line need to be paid back at the end of the credit term. Interest is charged on any outstanding balance.
By understanding the difference between a personal loan and a personal line of credit, you’ll be able to make an informed decision on the mode of funding you wish to opt for. Ideally, a personal loan is used to cover significant expenses or fund a sizeable investment. Meanwhile, a personal line of credit is recommended if you have a variable income or might need funds at a moment’s notice. So, map out your financial requirements so you can choose the financing avenue that suits your needs.