Personal loan vs. personal line of credit: Which one is better?

Some financial solutions are meant to help you cover a big expense, while some can help you cover your bases. That's about as complicated as it gets when we compare a personal loan to a personal line of credit. One is money now. The other is more of a security blanket in case you need money another time.

Personal line of credit vs. personal loan

A personal line of credit is like a credit card in some aspects. When you're approved, you get a credit limit that you can borrow against…or not. You can borrow, repay, and borrow more as often as you like, up to your limit.

A personal loan, on the other hand, is a lump sum of money that you get all at once after your loan is approved.

Here's how they work.

Personal line of credit

With a personal line of credit (PLOC), you get approved for a set credit limit. Once your credit line is open, you can make purchases against it using a linked debit card or paper checks.

Meanwhile, the lender expects you to pay back what you borrow with interest. As you pay down your credit line, you free up available credit that you can tap into again.

Hmm…that sounds like a credit card.

Yep, a personal line of credit works a lot like a credit card. Only, you typically can't earn rewards on purchases. Also, there might be a finite window of time during which you can use your line of credit. For example, your lender might give you a five-year draw period. That's when you can borrow against your credit line.

Once the draw period ends, you'll have to repay any remaining balance due with interest and you won't be able to borrow more. At this point, you'll start paying off the loan in monthly payments that are calculated to pay off your balance by the end of the repayment term. Your payment amount could fluctuate if your PLOC has a variable interest rate.

For a secured personal line of credit, you pledge something of value as a guarantee that you'll repay the loan. Usually, that something would be money in the bank, such as a Certificate of Deposit (CD) account. This kind of personal line of credit could have a lower interest rate compared to an unsecured line of credit.

Personal loan

A personal loan is an installment loan. You'll get all the money in one lump sum and pay it back in equal installments over a predetermined repayment term, usually two to five years. You could use money from a personal loan to pay for just about anything.

For example, some of the most popular uses for a personal loan include:

• Consolidate credit card debt

• Home repairs and renovations

• Moving expenses

• Large purchases

• Medical bills

Personal loans also need to be repaid with interest. The payment schedule will depend on how much you borrow and the repayment term you choose.

How are personal loans and personal lines of credit similar?

Personal lines of credit and personal loans have a few things in common. Here are some of the similarities:

• Repayment. Both must be repaid with interest, and you might also have to pay fees for a personal loan or line of credit.

• Availability. It's possible to find either borrowing option at traditional banks, credit unions, and online lenders.

• Qualification. Credit scores and income are usually two of the most important requirements to get a personal loan or line of credit. Lenders usually require a hard credit pull to make a decision.

• Collateral. Personal loans and lines of credit can be secured loans, meaning you borrow against something of value (like a savings account or a certificate of deposit).

• …or no collateral. More often, personal loans and lines of credit are unsecured loans, meaning you qualify based on your creditworthiness and financial situation, not your collateral.

Most importantly, personal loans and lines of credit serve the same purpose: to give you access to cash when you need it.

You could use either one to fund large purchases (or small ones), plan for short- and long-term financial goals, or simply get caught up on bills. That kind of flexibility is great because you could use a personal loan or line of credit to pay for one thing or multiple things.

Personal loan vs. personal line of credit: the main differences

While a personal line of credit and a personal loan are alike in some respects, there are several things that set them apart. Here are a few differences:

• Interest rates. Personal loans tend to have fixed interest rates, while a line of credit may have a variable rate. A variable rate can move up or down over time, affecting your monthly payment.

• Repayment terms. Lenders may offer different repayment terms for a personal loan vs. line of credit. For example, you might be able to repay a personal loan over 60 months but only have 24 months to repay a line of credit.

• Loan amounts. There can be differences in how much you can borrow with a line of credit vs. a loan. Lenders might set one limit for loans and another for lines of credit.

• Fees. Personal loan lenders can charge origination fees or prepayment penalties. With a line of credit, you might have to pay an upfront or annual administrative fee.

Pro tip: Achieve Personal Loans have no prepayment penalties or hidden fees.

How personal lines of credit and loans compare, side by side

Tips to help you decide between a personal loan and a line of credit

A personal loan isn't necessarily better than a personal line of credit. The right choice depends on what you need to borrow money for and how you want to repay it.

Here are a few tips for choosing between a personal loan and a personal line of credit:

• Consider what you need to borrow money for, such as emergency expenses, short- or long-term goals, or large purchases.

• Estimate how much you need to borrow.

• Calculate how much you can afford to pay toward a loan or line of credit each month.

• Think about what kind of repayment term fits your budget best.

A personal loan tends to fit when:

• You know the exact amount you need

• You want one predictable, fixed payment

• You're consolidating high-interest credit card balances into a single payoff

• You're covering a one-time planned expense like a move or a home repair

A line of credit tends to fit when:

• You're not sure of the total cost yet

• You'll borrow in stages over time

• You want to maintain reusable, just-in-case access to funds

It's always a good idea to check the rates and fees you might pay for a personal loan or line of credit. If you're looking for a fixed rate and fixed payments, a personal loan may be the better match.

You can prequalify through Achieve Personal Loans to check estimated rates and terms for a personal loan. Achieve Personal Loans uses a soft inquiry for prequalification that won't affect your credit score. Final terms depend on full underwriting and may differ from the estimate.

Not all applicants will qualify for interest rate discounts. Offered interest rate discounts are not guaranteed, will vary based on several factors, and are subject to credit approval and other conditions. Adding a co-borrower with sufficient income; using at least eighty-five percent (85%) of the loan proceeds to pay off qualifying existing debt directly; and/or showing proof of qualifying retirement savings, could help some customers qualify for lower rates. To be considered for any interest rate discount, customers must apply for and submit an Achieve personal loan application, meet one or up to all three of the interest rate discount qualifiers, and meet our underwriting criteria. Any applicable interest rate discount will be reflected in the offer and will fall within our standard range of rates. Applicants with great credit who qualify for the lowest rate will not be eligible for additional interest rate discounts.