6 Ways A Personal Loan is Different From a Line of Credit

6 Ways A Personal Loan is Different From a Line of Credit
6 Ways A Personal Loan is Different From a Line of Credit

6 Ways A Personal Loan is Different From a Line of Credit

You might need to borrow money at any point in your life. However, you can safely borrow money from financial institutions by availing of their loan options. An array of choices in the market allows you to borrow money legally without any hassle.

While a personal loan can be the first option to come to your mind in such scenarios, another option is called the Line of Credit. These are easy and convenient options for securely borrowing money from a legitimate lender.

A personal loan and the Line of Credit allow the borrower to get money from the lender at the agreed interest rate. However, there are some differences between them in terms of their usability. Let us see their differences to choose the perfect product that suits your requirements.

What is a Personal Loan?

A personal loan is a one-time loan to cover personal expenses. It can pay for your education, wedding, travel, medical emergencies, and home renovation expenses. Even your existing debts can be covered under a personal loan. A personal loan can efficiently act as a debt consolidation loan by applying for an instant loan online.

While a personal loan can be secured by collateral, many organisations in India like Clix Capital are offering collateral-free instant personal loans for your every need!

With their instant loan online, you can apply for a personal loan anytime, anywhere!

What is a Line of Credit (LOC)?

Line of Credit or LOC allows a person to borrow money from a lender for personal use, but unlike a personal loan, it is more flexible. LOC enables borrowers to borrow money according to their needs up to a limit. This credit limit might depend on the collateral. It is more flexible since the borrower can decide the time and amount to withdraw according to their convenience. There is a predetermined limit; a borrower might choose to stay a lot below that limit, and the interest levied will depend on it. The borrower can also repay the amount flexibly in instalments or at once.

If you are wondering which one of these you should choose, here are the differences between them.

#1 Disbursal Type

The main contrast between a personal loan and an LOC is their disbursal type. While a personal loan is a one-time process where the entire amount is credited to the borrower's account as a lump sum, an LOC is more flexible. There is a pre-set limit to an LOC, and you can access any amount up to that limit any time after its approval. The draw period for an LOC is also predetermined. However, you can extend this period by renewing the credit limit.

While a personal loan is a fixed amount, an LOC might act as a credit card because of its disbursement nature.

#2 The Rate of Interest

A significant advantage of using an LOC is that the interest rate reduces as you gradually repay the loan. The interest rates are different for personal loans and credit lines. A personal loan is a lump sum, so the levied interest applies to the entire amount. On the other hand, a credit line allows flexible disbursement, so the charged interest is placed on only the withdrawn amount.

However, personal loan interest rates are generally lower than the LOC. Since it allows a more flexible process, it tends to have higher interest rates. So, choose wisely!

#3 Qualification Criteria

The eligibility for a personal loan and an LOC might also differ because of their different natures. While you can quickly apply for an instant personal loan online for personal expenses, an LOC might require an additional account and other documents.

The borrower's credit score for an LOC must be above 700, and the Debt-to-Income ratio should be in a decent form. The borrower will have to show proof of their income to ensure the lender about the repayment.

You can check your credit score for free on the websites of leading financial institutions before applying for a personal loan or an LOC since it affects your eligibility and interest rates!

#4 How to Apply?

While both of these can be simple to apply, the main requirement to apply for a personal loan is to get an estimation of your needs. Since you get a lump sum amount after applying for an instant loan online, you need to understand how much money you need before applying. Once the loan is sanctioned, you cannot change the disbursed amount.

The application procedure requires you to submit the document or the collateral to claim a loan against that. In the case of an LOC, the amount does not need to be fixed since this is a flexible process. You can change your decision at any given time during the tenure and withdraw accordingly.

#5 Credit Limit

A personal loan does not have an additional limit since it disburses the entire amount to the borrower's account at once. However, an LOC has a limit based on the collateral (i.e., A Fixed Deposit or similar) based on which the limit is set.

#6 Process of Repayment

According to the loan agreement, any personal loan must be repaid within the specified tenure. The EMI amount depends on your entire loan amount and convenience. The EMI for your required personal loan can vary, and you can easily calculate EMIs online.

On the other hand, an LOC allows for easy repayments. You can repay the amount more flexibly, but you must pay the interest monthly without fail to avoid penalty.

While a personal loan is more stable, an LOC allows flexibility for any ongoing project that requires varied investments. An LOC can be the best choice when you do not have an estimation of your expenses. However, a personal loan is more convenient when you know your needs.

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