How to Distinguish Personal Loans From a Line of Credit

personal loanLike most individuals, there will be moments in your life when you will desire or need financial assistance. Maybe you wish to fund a large-scale renovation project for your house or cover an unforeseen medical cost. For debt management purposes, you may even need a lower interest rate than the one you already have on your current loan

Depending on your financial circumstances, a personal loan or a line of credit may assist you in reaching your objectives. Even though both forms of financing may provide you with access to the money you need, they operate in quite different ways.

When compared to a line of credit, a personal loan differs. It allows you to borrow a set amount of money and return it at a predetermined payment amount over a specified period. It is more manageable in terms of budgeting. However, lines of credit may provide you with more borrowing options. With a line of credit, you may borrow money up to the amount of your credit limit, return the amounts, and borrow more funds as necessary.

A thorough understanding of the differences between these two financial products may be very beneficial in selecting the most appropriate one for your needs.

Definition of Personal Loans and Lines of Credit

Personal loans are also known as signature loans. They got this moniker because if you qualify, you can obtain a loan with only your signature. Because the loan is unsecured, no assets or security—such as a house or car—are required to obtain funding.

Lines of credit, on the other hand, function similarly to credit card accounts. You may borrow, pay off your debt, and use your available credit line as many times as you like. You may be able to qualify for an unsecured personal line of credit with only your signature, as you would for a personal loan. However, securing your line of credit with an asset may result in a lower interest rate.

Key Differences between Personal Loans and Line of Credit

Application Process

The application procedure for a personal loan or a line of credit is comparable. To begin, a lender will examine your credit record and score, as well as your income and assets, to assess if you are a reasonable risk for credit. The stronger your credit, the more likely you are to get approved for any kind of financing.

One of the most significant distinctions between applying for a personal loan and a line of credit is as follows: A personal loan requires you to know how much money you want to borrow ahead of time.


Personal loans and lines of credit are two different financial instruments with distinct qualifying requirements. The significant difference between the two is that lenders may need you to have higher credit to be accepted for a line of credit.

Of course, each lender is unique. However, to qualify for a personal loan or line of credit, most lenders will need you to fulfill the following requirements:

  • Credit rating ranges from good to excellent

  • Acceptable debt-to-income ratio

  • Indications of a steady income.

Interest Rates

Whenever you pick out a personal loan, you are usually charged interest on the amount borrowed starting on the first day of the loan. In most cases, you will be charged a set interest rate. That implies that your interest rate will remain constant for the duration of your loan. Your credit and your lender heavily influence personal loan interest rates. Average rates may vary from little more than 4% for borrowers with excellent credit to as high as 25% for consumers with bad credit.

While lines of credit may provide you with more freedom, this usually comes at a cost, notably a higher interest rate. However, unlike personal loans, the interest rate does not begin to accrue as soon as you are accepted. Instead, you begin paying interest on a line of credit as soon as you use any part of the money available to you. Furthermore, the rates on credit lines are flexible and may vary over time.

Final Thoughts

Do your homework before choosing a product and a lender, including a credit check. You can be confident you’re receiving the best deal for your situation if you don’t rush into a decision. If you take out a personal loan to fund a big project, you may need to borrow again. That means another application and perhaps another account and inquiry on your credit report. Taking up a line of credit when you don’t need it may result in higher interest rates than a personal loan.

We emphasize the time-sensitive requirement for quick financing at Athens Finance. We want to make the borrowing procedure as fast and easy as possible, whether you seek to repair credit or consolidate a few payments. Call us at 256-230-6764 if you need personal loans in Athens, AL!

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