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Line of Credit Vs. Loans: What’s the Difference
May 7, 2020●
5 minute read●
Looking at getting a line of credit?
Are you looking to access a line of credit? Maybe you’re tossing up whether to get a line of credit or a personal loan. If you need more clarity on the two, Jacaranda is here to help! The main difference between a loan and a line of credit is how you get the money and how you repay it. We’ll give you the rundown on the difference between lines of credit and personal loans as well as when to apply for them.
Let’s get started.
What is a line of credit?
To put it simply, a line of credit is a revolving account that lets you borrow, repay and then redraw again. Sitting between loans and credit cards, a line of credit is perfect for anyone looking for more flexibility with their finance. Similar to a credit card, you’re able to conveniently withdraw funds up to a certain limit, after which you’ll be charged interest. You’ll then need to repay the amount you withdrew plus the interest on top of that.
What’s the benefit of this? Let’s break it down. If you need cash for ongoing costs but don’t know exactly how much you’ll need, a line of credit can be a convenient way to access finance without having to apply for multiple loans. Take, for instance, if you’re a homeowner, a line of credit can allow you to pay for ongoing remodelling costs. It’s worth noting, however, that depending on your lender there may be some limitations on how and when you can withdraw.
Different lines of credit
Generally speaking, there are 3 lines of credit you can get. These are home equity, personal and business. Lines of credit are also very similar to credit cards because it allows you to borrow funds as needed, without having to take the full amount in a lump sum.
What is a loan?
Loans are a little simpler and more common than lines of credit. A loan is essentially a lump sum of money that you’ll need to repay with interest over a fixed term. Generally, you’ll have to repay in agreed-upon instalments over a certain period of time.
Most people will take out some type of loan throughout their lifetime. Loans are useful for when you need to make a purchase or pay for something that you can’t afford to pay for outright. You’ll find that most loans are amortised, meaning that each repayment will be the same. So, if you borrow a $5,000 loan with a 20% interest rate and decide to pay in monthly instalments over a term of 24 months, you’ll be required to pay $250 every month.
Different types of loans
There are different types of loans for different needs. Some of the most common types of loans are mortgages (home loan), auto loans (car loan), student loans, business loans and personal loans.
Loan vs Line of a credit
Although quite similar in nature, loans and lines of credit differ in a number of ways. Below, we’ve listed some key differences between the two:
When you apply and are approved for a personal loan you’ll be given the entirety of the loan almost immediately. This allows you to purchase or pay for the item or expense that the loan was meant for. If you require additional funds after that, you’ll need to apply for another loan. This might be a bit more difficult to be approved for if you haven’t paid out your first loan completely.
This is where lines of credit shine brightest! Once you have been approved for a line of credit you can continue to to withdraw up to your credit limit. For instance, if your credit limit is $5,000 and you spend $2,000 one month, you still have an additional $3,000 to withdraw if you need it.
A loan will typically have a fixed term, meaning you’ll need to repay the loan plus interest within a certain time period.
Unlike a loan, a line of credit will not have an end date. A line of credit ends when you decide to close the account or the credit provider cancels the account.
A credit card is quite unique in that if you pay your balance in full every month you won’t have to pay interest on the charges. However other lines of credit will charge you each time you withdraw.
Pros and cons: Line of credit
|Access to funds: You have easy access to funds without having to submit another application (provided you’re below your credit limit)
||Overspending: Easy access to funds can work against you. Some people have a tendency to overspend with a line of credit
|Only charged on what you use: Interest will only be charged on what you use. If you repay back your credit card on time every month you won’t be charged interest
||Annual/monthly maintenance fees: You’ll be charged these fees regardless of if you withdraw credit or not
Pros and cons: Loans
|Lump-sum: Get a large chunk of money in a short amount of time
||Potential fees: For late or missed payments
|Consolidate debt: You can apply for a personal loan to consolidate your debts into one simple repayment
||Collateral: Sometimes you’ll need to attach an asset such as a car or motorbike to secure your loan
|Flexible use: A personal loan can be used for almost anything
||Credit damage: Applying for a loan might cause a short term dip in your credit score
For more helpful information about accessing a line of credit or finance, visit the Moneysmart website.
Up to speed on everything to do with lines of credit and personal loans? Great! Unfortunately, at this moment we do not offer lines of credit. However, you’ll be happy to know that Jacaranda provides fast online personal loans from $300 to $10,000. So whether you’re looking to borrow a little loan to cover a small expense or a large amount for an extravagant purchase, we’ve got a loan for you!
Scroll up to the top of this page to begin your application. Using the slider, select the amount you’d like to borrow and your desired repayment period and hit ‘Apply Now.’ You could have the cash you need before you know it!
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Jacaranda has plenty of more interesting and informative reads. Visit the Jacaranda blog to learn about all things credit and finance like peer to peer lending and how to check your credit score online!
Written by Jacaranda Team