Personal Loan, Credit Card, or Personal Line of Credit: Which one is better?

Whenever you are in dire need of finance, you can always choose to go beyond personal loans and credit cards. A Personal Line of Credit gives you easy access to “money on demand” irrespective of whether you have large or small expenses. A line of credit is usually approved by financial institutions such as banks as well as credit unions to their existing customers upon meeting certain eligibility criteria.

What do you mean by a Personal Line of Credit?

A personal line of credit gives one easy access to money, but “on demand.” It is quite different when compared to a personal loan or a credit card. It has an upper edge over both of them.

It is basically an agreement between the financial lender and the applicant. The financial lender agrees to lend a certain amount of money subjected to an upper limit, which can be withdrawn by the applicant at any time. When compared to credit cards, a personal line of credit has a lower interest rate. Besides, unlike one-time access to funds in case of personal loans, a line of credit gives the applicant an option of variable access to funds.

How does a Personal Line of Credit work?

Financial lenders such as banks usually offer the option of a line of credit to high net worth (HNI) clients. In case an applicant is eligible for the same, banks usually allot a certain amount of funds which can be withdrawn within a given time period. Moreover, the applicant will be charged interest only on the amount that is borrowed. Upon successful repayment of the borrowed amount, the applicant once again becomes eligible to avail a line of credit. Good credit history can help the applicant get a better rate of interest, and if possible, to negotiate on any collateral.

Similarities and differences between a Personal Line of Credit and other forms of credit?

Similarities between a Personal Line of Credit and Credit Card

ü Both of them are unsecured revolving credit lines

ü Both have a certain pre-set limit which allows for spending only up to the credit limit

ü The applicant can choose between making minimum payments and paying off the total balance until the end of each month

Differences between a Personal Line of Credit and Credit Card

ü One can avail lower interest rates in case of a credit line when compared to that of a credit card

ü A personal line of credit is much more difficult to avail than a credit card

ü A personal line of credit has a much higher limit when compared to a credit card

Similarities between a Personal Line of Credit and Personal Loan

ü Both of them are an easy way to get access to instant cash whenever you need it

ü No collateral is required in both cases as they are unsecured credits.

ü Both of them have similar credit requirements and the application process. Financial lenders usually review the creditworthiness and income of the applicant to decide on the approval of the application.

Differences between a Personal Line of Credit and Personal Loan

Whenever one avails a personal loan, the approved loan amount is disbursed at once. A line of credit is a revolving credit. One can choose to withdraw or borrow the pre-set amount as and when it is required.

ü In case of a line of credit, the interest is charged only on the withdrawn amount. However, with respect to personal loans, interest is charged on the entire amount.

ü Whenever you repay the personal loan, the loan account gets closed. You will have to reapply for a loan in case you need emergency funds in the future. In case of a personal line of credit, the same remains active for a lifetime provided you repay the borrowed amount on a regular basis.

Best Uses of a Personal Line of Credit

Personal lines of credit can be utilised in a majority of the situations as follows:

ü Home improvement projects

Renovating one’s home can be an ongoing project. One can choose to take a single project at a time and get done with the same before starting another one. In such situations, a personal line of credit can help one with recurring expenses of such projects.

ü Business opportunity

A personal line of credit is an excellent source of additional funds to grow one’s business by allowing one to invest in sales and marketing, advertising and so on.

ü People with irregular flow of income

In case of a self-employed individual, the monthly income can vary. Withdrawing funds from a line of credit can help one to pay their monthly bills until their next paycheck comes in.

ü Emergency situations

A personal line of credit can be quite helpful in critical situations like a medical emergency.