Personal Loans

Personal Loan vs. a Personal Line of Credit

Before you decide between a personal loan vs. personal line of credit, make sure you know the differences -- and what's likely to work for you.
A married couple discusses their personal loan options while looking a their bills and their computer.
By Miranda Marquit
Updated on: November 28th, 2021

When you need to borrow money for personal expenses, you might be confronted with a choice: getting a personal loan or a line of credit.

While both are considered “credit lines,” they function a little bit differently from each other. Learn more about a personal loan vs. a personal line of credit so you can decide which is most likely to help you reach your financial goals and fit your situation.

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What Is a Personal Loan?

A personal loan is designed to help you take care of personal expenses, like debt consolidation, vacation, or a large purchase. In general, it comes with a fixed loan amount, as well as a set term. You’re charged interest — usually at a fixed rate — and you make regular payments each month until the loan is paid off.

In many cases, a personal loan is unsecured, meaning you don’t need to provide collateral to get your funds. There are secured personal loans, which require you to have a certain amount in your savings account or which might require you to offer a valuable item, like a car, as collateral, but these aren’t very common.

Personal Loan Pros and Cons

Pros Cons
Fixed payments make it easy to create a budget around monthly payments. You’re limited to one lump sum when you borrow; can’t access new funds without applying for a new loan.
Receive the money upfront, so it can quickly be used for a major purchase. Many personal loans come with higher origination fees, increasing the upfront cost.
With a fixed rate, your payments and interest don’t usually change, potentially shielding you from rate hikes later.

What Is a Personal Line of Credit?

On the other hand, a personal line of credit is revolving. Rather than being issued in one lump sum, you receive a credit limit. You can borrow funds up to that set amount, as needed.

With a personal line of credit, you can pay down what you borrowed, and that leaves you room to access funds again — without the need to apply for another loan. It’s similar to using a credit card and is usually unsecured.

As with a personal loan, a personal line of credit is designed to be used to cover personal expenses. This can be a major purchase or a vacation. A personal line of credit can also be used to bridge funding gaps. For example, if you need money in the short term to cover a budget shortfall, accessing your personal line of credit can be quick and easy, allowing you to get the money you need without waiting on a loan decision.

However, personal lines of credit usually have variable interest rates, which means your minimum payment can change as interest rates change. You only pay interest on the amount you’ve used, though. Interest doesn’t accrue until you make use of the funds, unlike a personal loan, where interest begins accruing as soon as you receive your lump sum.

Personal Line of Credit Pros and Cons

Pros Cons
Access to additional funds without applying for a new loan. Variable interest rates can mean higher minimum payments.
Only accrue interest on the money you use. Many personal lines of credit come with higher interest rates, similar to credit card rates.
When connected to a checking account, it can be used to easily transfer money to cover a budget shortfall.

Personal Loan vs. a Personal Line of Credit

Personal Loans Personal Lines of Credit
Fixed APR Variable APR
Same monthly payment Different monthly payments, based on the balance
Repay over a set period of time Repay over time, like using a credit card
Unsecured Unsecured
Must apply for a new loan if you want additional funds No need to apply for a new loan if you want additional funds

Which Is Better: Personal Loan or Line of Credit?

When deciding between a personal loan vs. a line of credit, it’s important to consider your own situation. Neither is better than the other. Instead, one might work better for your circumstances, depending on your individual needs and goals.

A personal loan might be better if:

If you need a larger loan amount or need all the money upfront, a personal loan can be a good tool. Often, a personal loan may be best for those making large purchases or using the loan for debt consolidation.

A personal loan can also work well for someone who wants a fixed payment and a known payoff date. With a personal loan, you know how much you will pay each month and exactly when the loan will be paid off. This can provide you with the ability to budget for your payment more easily.

A personal line of credit might be better if:

For those who are looking for access to funds that can essentially be reused over time, a personal line of credit can make sense. For example, you might want to access the line to make improvements, but only get the money as needed. Additionally, if you have a variable income or are concerned about cash flow, it might make sense to get a personal line of credit that you can connect to your checking account.

A personal line of credit can potentially work for someone who wants to re-use their funds as they’re paid down, without the need to re-apply for a loan each time.

Frequently Asked Questions

What is cheaper, a personal loan or a line of credit?

In general, closing costs are often higher for a personal loan than for a line of credit. However, a personal line of credit might have a higher interest rate. Run the numbers to see what might work for you. You’re only charged interest on the funds you use from a line of credit, so if you pay down the line of credit regularly, you might be able to save some money on interest costs.

What happens if I don’t use my line of credit?

If you don’t use your available credit, you could potentially see a boost to your credit score, since it lowers your credit utilization. However, depending on the lender, if you don’t use your line of credit, after a certain amount of time, it could be closed.

What credit score is needed for a personal loan or line of credit?

It depends on your lender. Some lenders require a higher credit score, above 680. However, in some cases, you won’t get the best interest rate unless you have a credit score of above 700 to 720. There are some lenders that offer personal loans or lines of credit for those with poor to fair credit. However, those lenders often charge much higher interest rates.