Personal loan vs line of credit

Posted on Friday, November 30, 2018 - 13:51

Being faced with a financial situation that needs financing can be challenging. This is more so when you are faced with either taking out a personal loan or a line of credit. Comparing your options can pay off and possibly save you from making an expensive decision that can impact your finances. Here are five things to consider.

1. Lump sum vs Use as you need?

When it comes to choosing a finance option that is suitable for your situation it will depend on what you need it for. This can help you know if the features of a personal loan or line of credit are suitable for it. A personal loan pays out a lump sum of which you can handle expenses off the bat, but a line of credit has a maximum credit that can be used as you need it.

2. Interest rate

Both a personal loan and line of credit can help you take care of expenses such as debt, bills, medical expenses and more. However, they differ on the interest rate. Most personal loans come with a fixed interest rate which is charged on the total amount of your repayments which you can choose to either make weekly, fortnightly and monthly. The interest rate on a line of credit is charged monthly on the amount which you have used, which can lead to slightly higher rates when compared to a personal loan because the amount is not fixed.

3. Loan terms

One of the other distinct factors of a personal loan is that it comes with a longer term which usually ranges from 1 to 7 years. A line of credit does not come with terms, but rather require that you pay back the amount with interest to make the next amount available. This is something that needs to be carefully considered to see if it is suitable for your needs. Carefully consider the loan features to see if it something that is suitable for you.

4. Fees and charges

The common mistake that trips up people is focusing their attention on the interest rate of a loan instead of looking beyond it. This means looking at the fees and charges to see if it is suitable for you. Personal loans tend to charge a monthly service and application fee, but a line of credits charge an annual fee. It is vital to check the potential hidden fees that can be charged by your lender so that you have a clear picture if it is affordable for you or not. Not doing this basic check can lead to a very costly finance option that could possibly end up costing you.

5. Other considerations

Your current financial situation is different from the next person, which is why you need to carefully assess if you will be able to afford whichever finance option you decide on. A personal loan may be suitable for people who want a lump sum to help pay off a major expense but need enough wiggle room when it comes to repayments to pay off the amount. If you are someone that struggles meeting monthly repayments, a line of credit may not be suitable for you.

Speaking to a financial advisor or a broker can help you know which option will be best suited for your situations so that you can avoid making a costly mistake altogether. Remember to check your credit score before applying for finance to see if you need to fix any errors or arrears that can affect your application for finance.

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