Looking for the best borrowing option to fit your unique financial situation? Are you unsure which types of credit will serve your needs? Before you dive into the world of borrowing money, consider the difference between a line of credit vs loan. By doing your research and pinpointing the key differentiating factors, you can decide on the option that works better for you.
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The difference between a line of credit and a loan
Loans and lines of credit are both ways to borrow money from lenders. Approval for either type of credit depends on your plans for the funding, your financial history, and your credit rating. Some lenders also take into account any prior relationship you have with them. But when it comes to a credit line vs loan, you should be aware of a few key differences.
Line of credit
One good way to explain a line of credit is that it’s like a credit card. With a line of credit, your lender is usually your bank, and the bank will offer you a set credit limit. You can borrow money up to the maximum amount, pay it back with interest, and borrow up to your credit limit again.
This flexible borrowing arrangement is known as a revolving credit limit. Typically, you can use a line of credit for almost anything, from taking a vacation to buying groceries. However, credit lines often have higher interest rates and lower dollar amounts than regular loans.
Loan
Loans, on the other hand, usually come with non-revolving credit limits. For instance, if you borrow $2,000, you can only borrow that $2,000 once. Then, you pay down your debt until the balance reaches $0.
A loan may also come with strings attached. You may only be able to use it for a specific purpose, such as home improvements. Additionally, loans often have lower interest rates and higher dollar amounts than lines of credit.
Unsecured and secured lines of credit
One similarity between a line of credit vs loan is that they can both come as secured or unsecured debts. If a line of credit is unsecured, that means you don’t have to offer collateral to obtain the loan.
Many lenders prefer secured credit lines because they can recoup losses if you default. Having collateral backing your secured credit line could result in lower interest rates and higher credit limits. You might even be able to get a secured line of credit with a bad credit score.
Home equity line of credit
A home equity line of credit, or HELOC, is the most common type of secured credit line. You secure these credit lines with up to 80% of the equity in your home.
Personal line of credit
Personal lines of credit give you a way to access unsecured funds for big expenses, but you must fit a few key criteria to be eligible:
- Reliable, provable income
- No defaults on your credit history
- A credit score of 680 or higher
But if you’re in the 11% of credit-invisible U.S. adults, you may not qualify for personal line of credit no matter what.
Business line of credit
Business lines of credit provide businesses with a way to borrow money as needed. These arrangements will either be secured or unsecured, depending on the business.
Demand line of credit
A demand line of credit is an uncommon arrangement that comes either secured or unsecured. While the borrower may spend up to the full credit limit, the lender maintains the right to demand payment in full at any time.
Securities-backed line of credit
This secured-demand line of credit lets you borrow up to 50-90% of the assets in your investment account. But you can’t use the money to trade securities, and if the value of your portfolio falls, the brokerage may demand full payment.
Secured loans
Loans may also be secured or unsecured. However, if you have a poor credit score, you’ll need to start with a secured loan to build credit first.
Mortgage
A mortgage is a type of secured loan that you use to purchase a home or property. Because you’re using the property as collateral on the loan, if you default on your mortgage, you risk losing the home to foreclosure.
Car loan
Car loans are also secured against your purchase. In this case, it’s your car. If you fail to make your payments on time or you choose to default entirely, your car may be repossessed.
Home improvement loan
Home improvement loans might not require collateral, so they can be either secured or unsecured. Homeowners use these loans to update their houses or fix issues such as a leaky roof.
Unsecured loans
Similar to unsecured lines of credit, unsecured loans often come with higher rates and no security deposit. But to qualify, you’ll need a solid credit history.
Personal loan
Personal loans, also known as signature loans, can come either secured or unsecured depending on your credit score and the amount you borrow. If you’re not sure whether you qualify for a personal loan, try a Credit Builder membership from MoneyLion.
The membership provides access to a loan of up to $1,000 with no hard credit check, no hidden fees, and additional perks. Plus, more than half our members raised their score by up to 27 points within 60 days!
Debt consolidation
With an unsecured debt consolidation loan, you can lump all of your debts together, setting them all at the same interest rate. To start with, your bank will pay off all of your outstanding debts. From there, you will make regular payments to one lender.
Student loans
Student loans are common, unsecured loans that cover educational expenses. Federal loans usually come with lower lending limits and set interest rates. On the other hand, private student loans come with variable interest rates, but borrowers may qualify for much more credit to pay for their schooling.
Finding funds that fit your needs
Both a loan and a credit line provide a way to borrow money from lenders. But with a line of credit, you can tap into a revolving balance, whereas loans are usually one-off debts at lower interest rates.
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