What is the difference between a line of credit and a loan?

Both lines of credit and loans are means for borrowing a sum of money that you can use for your own expenses. The differences lie in the way you will receive and repay back what you owe the lenders. Depending on the nature of your financial plan and circumstances, you may want to choose one over the other. Here are their brief definitions and the purpose of each explained in words that you can understand.

What is a loan?

Everybody is probably familiar with how a loan generally works. The lender will approve you for a certain amount of money, and you will have to make regular repayments of both the principle amount plus the interest over the course of a period that you have agreed upon. The amount of your repayment is divided into equal payments to make up the whole amount that you owe, which is the principle amount plus interest. The interest usually follows what the rate in the market is at the moment. You can get interest as low as what you would expect from the current market rate, or as high as the lender wants according to how your credit history was assessed during the application process. The length of the period which is needed to complete the loan is determined by their calculation and consideration of your financial standing, with input from you about your preferences. It can vary from a few months to years, depending on the amount you’re applying for. House mortgages and car loans typically take years to complete, as opposed to a smaller personal loan which can be completed in a matter of months.

Line of credit

When you are approved of a line of credit, a bank or other financial institution grants you a certain amount which you can borrow subsequentially in small chunks of loans up to a set maximum limit over the period of the agreed term. You can spend it for any purpose such as renovating your house, trips, repairs or paying off other debts. Also known as a revolving account, the lenders let borrowers draw money to a certain limit and repay it regularly with interest. You can compare it to how a credit card works where you can always spend it as long as your limit permits. However, unlike a credit card, full payment in a line of credit always includes interest. Typical line of credit types are commonly found in home equity line of credit and business line of credit. A line of credit closes after a certain number of months or years before you will be required to start your repayment. During that time you are offered a minimum amount each month so you can avoid any additional fees or penalties that may apply.

Personal loan & Line of credit

When you need to do a one-time larger purchase or expense, such as buying a home or car, a loan will suit you better. Also, loans usually have fixed rates, so your rate is locked regardless of any fluctuation in the rate market. This would make for better financial planning as you can anticipate the same repayment amounts throughout the process.  If you have a good credit score and history you should be able to negotiate a really good interest rate over the course of the loan term.

A line of credit, on the other hand, better suits business owners who operate their businesses and need continuous smaller expenses on a regular basis. The lender offers access to the fund whenever you need it, and you repay only what you take out. This is beneficial as it helps to ease cash flow and income for accounting cycles. However, the interest rate is usually at variable rates, which based on the current rate in the market. So your repayment may fluctuate for better or worse according to the current situation.

Find out what a personal loan has to offer at SpotMeNow Australia, with loans up to $5,000 and easy flexible repayment options. Check out how easy it is to apply for a loan today!

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