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Line of credit vs loan: Which is right for you?

September 15, 2023
min read

Loans and lines of credit are both ways of borrowing money, but there are key differences that affect how much you can borrow and the interest you’ll pay.

Woman looks at loans on computer

If you need to borrow money, you’re probably asking yourself: Should I take out a loan or open a new line of credit?

To answer that, let’s break down the main differences between a personal loan vs a line of credit:

Personal loan: A lump sum of money you receive and pay back on a set schedule. The interest rate is typically fixed, which means it stays the same over the lifetime of your loan.

Line of credit: You can borrow what you need when you need it, and only pay interest on what you use. You’ll also have an authorized limit, which defines the maximum amount of money you can borrow.  

Before you can choose between them, you need to figure out why you need the money and how much you want to borrow.

Here’s how to do it:

Step 1: Consider your goals

What do you intend to do with the money you’re borrowing? Answering this question will help you decide between a loan or a line of credit. You may need to borrow for any of the following reasons:

Debt consolidation

Do you owe money across multiple credit cards? Perhaps you’ve used one or more credit cards to finance a major purchase.

If so, you’re paying a high interest rate on any outstanding balance you have—and you could be paying less.

With a Payoff Loan, you can consolidate multiple debts into one loan. Wrap your debt into one easy loan payment to save thousands of dollars in interest costs. Get a lower interest rate and wrap your debt into a single monthly payment.

Home renovations

If you’re thinking of remodeling your kitchen or landscaping your yard, you may not have all the cash up front. Instead, you can use the equity in your home to fund your renovation project.

Equity is the amount of your home that you own. As you continue to pay off more of your mortgage, you build more equity in your home.

A home equity line of credit (HELOC) allows you to borrow some of that equity to pay for renovations or other expenses.

It typically has a variable interest rate, which means it could go up or down over the life of your loan.

A HELOC usually has a lower interest rate than a credit card. That’s because you use your home as collateral for the loan. Since the loan is secured by your home, you’ll qualify for a lower interest rate than you would with a credit card.

However, this means that if you miss payments, your home could be foreclosed.

Used responsibly, a HELOC can be a great borrowing tool—just be careful not to borrow more than you can afford to pay back.

What’s the difference between a home equity loan vs a line of credit?

A home equity loan is a type of personal loan that’s secured by your home.

You’ll borrow a set amount, get the money all at once, and pay it back on a set repayment schedule. One advantage with this route is you’ll know exactly how much interest you’ll pay and when the loan will be completely paid off.

On the other hand, a home equity line of credit is a revolving line of credit, so you can tap into it whenever you need to; you don’t need to apply for a new loan each time.

Car purchase

Looking to buy a vehicle? If so, a personal loan is likely what you’re looking for. You’ll get the cash you need for your purchase and then pay it back over time.

With a personal loan, you can fund your vehicle purchase using a repayment schedule. On top of that, making payments on time boosts your credit score, because it shows you can manage credit responsibly.

Step 2: Determine how much you need to borrow

Next up, find out the exact amount you’re looking to borrow—and how often you need to borrow. Let’s clear up a few more differences between the loans and lines of credit:

Personal loan

A personal loan is used to fund larger expenses that you will pay off over a set period, such as a vehicle, your education, or debt consolidation.

A personal loan typically has a lower interest rate than a credit card. On top of that, a loan usually has a fixed interest rate, so you can calculate exactly how much it’ll cost to repay your loan.

Once you pay off your loan, you’ll need to apply for a new one to receive more funds.

With a set payment schedule, a personal loan can make it easier to pay off the debt.

Line of credit

A secured line of credit has a much lower interest rate than a credit card. Plus, you only pay interest on the amount you use. You’ll keep paying interest until the amount you borrowed is fully paid back.

You can use the value of your home to get a mortgage-secured line of credit, which gives you a lower interest rate and a higher credit limit.

At Cambrian, you can apply online for a loan or line of credit.

Can I still get a line of credit without a home?

You can! It’s called an unsecured line of credit—for example, a credit card.

Since the loan isn’t secured by a home, you’ll pay a higher interest rate and have a lower credit limit. You could try to secure the loan with other assets, like your vehicle.

Step 3: Look for low interest rates

Whenever you make a loan payment, it’s made up of 2 parts:

  • The principal. A portion of the money you initially borrowed, which you gradually pay back.
  • The interest. The amount you’re charged for borrowing money.

By getting a loan with a lower interest rate, you pay less to borrow money and you can pay off your loan sooner.

Secured loans have lower interest rates. When a loan is secured by your home or vehicle, it gives the financial institution more confidence that you’ll repay it. They’ll offer a lower interest rate as a result.

Learn more about the differences between secured and unsecured loans.

Step 4: Find the loan you need at Cambrian!

Now that you know the difference between a line of credit vs a personal loan, you can determine which one will better suit your needs.

Ready to apply for a loan? We can help with that!

You can meet with a Cambrian Advisor online or in-person. We’re available on weekdays, weekends, and evenings! Book a meeting to talk about your loan options today.

Today’s Rates

*All rates and yields subject to change without notice.
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