In the 21st century, a lot of necessary things are purchased on credit. And it's not easy for the buyer to choose the most suitable loan among such a great variety of credits available. This article will help you to differentiate between the two most popular types: Personal Loans and Personal line of credit. They are similar in purpose and both cab be either secured or unsecured, but have different amounts and repayment process.
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Personal loans definition and characteristics.    

A Personal Loan is a precise amount issued for personal needs, usually to pay a one-time payment. The personal loan is repaid at a fixed or variable interest rate (APR) over a fixed period of time. Loan amount? You need to borrow at least $3000. The maximum amount of credit you can take depends on your credit score and other factors. The maturity of a personal loan can vary from one to ten years, depending on the lender. You can choose repayment options: from weekly, bi-weekly, semi-monthly and monthly payments. Your payments will be a combination of principal and interest. 

Let's take a closer look at credit rates (APR). Rates vary from lender to lender. Basically, the rates depend on your credit history and repayment ability. A survey of NerdWallet 1  lenders showed that interest rates on personal loans in 2017 looked on average:

How's your credit?

Score range

Estimated APR

Excellent

730 - 850

13.5%

Good

690 - 729

18.0%

Average

620 - 689

21.9%

Bad

300 - 619

27.3%; lowest scores unlikely to qualify

You should also distinguish between secured loans and unsecured loans. Secured loans are backed up by your collateral, your property or investment. This leads to higher borrowing and lower interest rates. However, unsecured loans usually have a faster approval process.

Let's look at what personal loans are used for:

  • Paying down any debt 
  • Purchase of durable goods (e.g. apartment, car, furniture)
  • Non-targeted purchases (e.g. phones, household appliances, food)
  • Paying for vacation 
  • Even buying a cat (Yes, this case is in the top 10 ridiculous credits).

Personal line of credit.

The model of using a personal credit line is similar to using a credit card. That is you are given a maximum amount and you can borrow money from this amount to buy any of your needs. Personal credit line is reusable. You only get access to your personal line of credit after the Bank approves you. And the most important thing is that you pay interest rates only for the amount you use, not for the entire credit limit as you do with a personal loan. Interest rates are variable and are usually tied to the US base rate. Line of credit amount? You can borrow a minimum of $5,000.  Personal credit lines may be secured or unsecured. Secured credit line is backed up by your property or investment. This leads to a lower interest rate and a higher credit limit. 

Interest rates of personal line of credit can be comparable or lower than those you can get for credit cards. For example, Wells Fargo 2  recently offered personal credit lines with an annual interest rate of 7.25% to 20%. At the same time, people who have other accounts are given a discount up to a percentage point. US Bank’s APRs were 9.5% to 13.5%, without an annual fee. The law requires lenders to provide you with APR information, so you will be able to compare offers, or you can do it on COMPACOM.com website. 

“A payment is usually structured as a credit card where the repayment starts immediately. As with credit cards, there is no set payment, but rather a minimum. However, some personal lines of credit can be created more like HELOC (Home equity line of credit), where there is a repayment period and then a later repayment period,” says Nessa Feddis, senior vice president and deputy chief adviser to The American bankers Association.

According to Feddis, a personal credit line requires a "simple" credit score, as opposed to credit cards. The exact definition of rates may vary depending on the financial institution. But overall the major credit scores start around 680 on the 300-850 scale used for Vantagescore 3 and most FICO4 assessment models. Each institution sets its own criteria for qualification.

“A personal line of credit is reported as revolving credit on your credit report,” says Rod Griffin, director of public education for credit bureau Experian 5. That means using too much of your credit line could hurt your scores.

A line of credit is used for:

  • Overexpenditure of funds
  • Insurance of any risks (e.g. export, import)
  • Repair of equipment 
  • Emergency situation

What's difference between Personal loan and Personal line of credit?

  Personal loan Persona line of credit
Terms predetermined, 1 - 7 years not limited
Amount a lump sum of money a borrowing limit
Rates monthly, on all the amount monthly, on the amount you borrow
Fees monthly service fee, application fee annual service fee
Repayment fixed not fixed
Withdrawal of money as soon as sign the agreement as long as you meet minimal monthly repayments

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How much would you like to borrow?

So, bfore deciding on which suits you more, compare all the pros and cons of each type. You may check out other loan options on COMPACOM.com