{"id":15712,"date":"2022-11-15T16:09:17","date_gmt":"2022-11-16T00:09:17","guid":{"rendered":"https:\/\/www.nerdwallet.com\/ca\/?page_id=15712"},"modified":"2024-04-30T18:25:44","modified_gmt":"2024-05-01T01:25:44","slug":"personal-loan-vs-line-of-credit","status":"publish","type":"page","link":"https:\/\/www.nerdwallet.com\/ca\/loans\/personal-loan-vs-line-of-credit","title":{"rendered":"Personal Loan vs. Line of Credit: How to Choose"},"content":{"rendered":"\n

The primary difference between a personal loan<\/a> and a line of credit is that a loan is a lump sum of money that must be repaid on a set schedule, whereas a line of credit can be used for borrowing on an ongoing basis.<\/p>\n\n\n\n

Personal loans and lines of credit can be useful tools for covering big expenses like a new car or home renovations. Knowing the differences, similarities, and how each works can help you decide which is a better choice for your borrowing needs.<\/p>\n\n\n\n

Personal loan vs. line of credit: Key differences<\/h2>\n\n\n\n
<\/th>Line of credit<\/th>Personal Loan<\/th><\/tr><\/thead>
Credit type<\/strong><\/td>Revolving.<\/td>Non-revolving.<\/td><\/tr>
Interest rate type<\/strong><\/td>Typically variable.<\/td>Fixed or variable.<\/td><\/tr>
Interest rate charged on<\/strong><\/td>Withdrawn funds only.<\/td>The entire loan amount.<\/td><\/tr>
Payment schedule<\/strong><\/td>None, but borrowers must make minimum monthly payments to keep their line of credit in good standing.<\/td>Pre-determined.<\/td><\/tr>
Typical uses<\/strong><\/td>Major purchases, emergencies, debt consolidation, ongoing purchases.<\/td>Major purchases, emergencies, debt consolidation. <\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n
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While personal loans and lines of credit are both borrowing methods, these differ in terms of how and when you access the funds, accrue interest, typical uses and more.<\/p>\n\n\n\n

Interest rate<\/strong><\/h3>\n\n\n\n

Personal loans and lines of credit are subject to interest \u2014 which varies in both cases. The interest on a line of credit accrues on the funds you withdraw, not on the full available amount in your account. You can pay back what you owe at any time to stop interest accruing or make a minimum payment each month, which usually covers your interest owed.<\/p>\n\n\n\n

With a personal loan, you\u2019ll pay interest on the entire lump-sum amount. You\u2019ll make set payments on a predetermined schedule over the course of your loan term. These payments will go toward both interest and your loan principal.<\/p>\n\n\n\n

Personal loan interest rates<\/a> can be either variable \u2014 subject to change \u2014 or fixed \u2014 stay the same over the loan\u2019s term. Although, lines of credit tend to have variable rates based on the lender\u2019s prime rate<\/a>.<\/p>\n\n\n\n

Typical uses<\/strong><\/h3>\n\n\n\n

A personal loan is typically used for a specific purpose, whereas a line of credit is often a way to access funds even if you don\u2019t know how you want to spend them yet. A line of credit can be a good backup for emergencies or unexpected expenses if you\u2019re still working on building up your emergency fund.<\/p>\n\n\n\n

There are no rules about what you can purchase with a line of credit versus a personal loan. Lines of credit can be ideal for ongoing, smaller needs because you only pay interest on the funds you use. Personal loans may be a better fit for major one-time expenses, like buying a car or doing a major home renovation.<\/p>\n\n\n\n

Revolving vs. non-revolving credit<\/strong><\/h3>\n\n\n\n

A line of credit is revolving credit<\/a> because you have open-ended access to the funds \u2014 you can keep withdrawing and repaying borrowed money when you need, provided your account is in good standing.<\/p>\n\n\n\n

A personal loan is non-revolving credit because once you pay it back, you lose access to that credit. If you want to access it again, you\u2019ll have to apply for another loan.<\/p>\n<\/div>\n\t<\/div>\n<\/div>\n<\/div><\/div><\/div>\n\n\n\n

Personal loans and lines of credit: Similarities<\/h2>\n\n\n\n

Although personal loans and lines of credit work differently, they do have a number of features in common.<\/p>\n\n\n\n

Qualification criteria<\/strong><\/h3>\n\n\n\n

Most financial institutions have a minimum set of criteria that you must pass to qualify to apply for a loan or line of credit, including:<\/p>\n\n\n\n