Personal Loans vs. Personal Lines of Credit: Which Is Right for You?

If you need to borrow money and don't want to put your home on the line, consider applying for a personal loan or personal line of credit. Both options are available from banks, credit unions, or online lenders, and neither requires collateral. But they serve different needs. A personal loan provides a wad of cash all at once, while a personal line of credit (PLOC) lets you borrow as you go.

We'll cover the benefits and drawbacks of each option, how personal loans and PLOCs impact your credit, and how to choose the right loan type for your financial goals.

Overview of each funding option

Lenders determine whether you qualify for either loan type and how much you'll pay to borrow by checking your credit report and income.

How personal loans work

If you're approved, you get a lump sum of cash, typically within a few days. Loan amounts range from about $500 to $100,000 or more, depending on the lender and your financial qualifications. Rates typically range from 6.49% to 35.99%, and you can use the cash for almost any personal expense. Most personal loans have fixed interest rates, and you begin repaying the entire loan (shortly after you receive it) in equal monthly payments over several months or years.

Learn More: How Do Personal Loans Work?

How personal lines of credit work

A personal line of credit works similarly to a credit card — once you're approved, you can borrow against your credit line as needed, typically by writing a check, through a Visa or Mastercard access card (that works similarly to a credit or debit card), requesting a transfer to your account, via mobile app, or in person. You can only borrow up to your credit limit.

PLOC rates range from around 10% APR to over 20% APR and are based on your credit. Some PLOCs have a limited draw period after which you can no longer borrow, while others have a continuous draw period. Each month, you make variable payments on your outstanding balance that may be interest-only during the card's draw period. Repayment periods tend to be longer than most personal loan repayment terms — such as 10 years, following a five-year draw period.

“A PLOC works better when you need access to funds over time, not all at once,” says Xavier Epps, Finance Expert and CEO at FinanceGuyX. “You only pay interest on what you use. It's ideal for variable expenses, such as ongoing home repairs or unpredictable business costs.” Bear in mind that you may pay an annual fee or a draw fee each time you borrow against your credit line, depending on the lender.

Comparing personal loans to personal lines of credit

Similarities and differences

Similarities of personal loans and lines of credit

• Typically unsecured: Some lenders offer secured personal loans or lines of credit, but most options are unsecured. If you're looking to borrow money without offering an asset as collateral, either option could meet your needs.
• Flexible use for personal expenses: While each lender has its own restrictions, you can typically use a personal loan or PLOC to pay for a variety of personal expenses, from home improvement to debt consolidation to family planning. Some lenders also allow you to use the funds for small business expenses.
• Lower rates than most credit cards: The average 2-year personal loan has a lower APR than the average credit card, according to the Federal Reserve. Personal line of credit rates vary, but rates are often lower than credit card APRs as well.
• Quick funding: While funding times vary, you can get a personal loan or PLOC much faster than a home equity loan or HELOC. Some lenders offer funding as soon as the same or next business day.
• Most lenders require a hard credit check: Personal loans and PLOCs typically require a hard credit inquiry.

Differences of personal loans and lines of credit

• Receipt of funds: Personal loans give you the entire loan amount at once, while PLOCs allow you to borrow repeatedly against your credit line.
• Interest rate type: Most personal loans have fixed interest rates, but PLOCs typically have variable interest rates, leading to unpredictable monthly payments. Personal loans generally come with lower starting APRs.
• Repayment terms: Personal loans have a fixed repayment schedule — you make the same monthly payment each month for the duration of the term, so it's easy to account for repayment in your budget. The repayment schedule for a PLOC depends on the lender, your interest rate, and how much of the credit line you use. It also could be years longer than the repayment period on a personal loan.
• Requirements: Personal loan and PLOC requirements can vary significantly from one lender to the next, but you may have an easier time finding a personal loan with fair credit or bad creditf. You typically need good credit to qualify for a PLOC, as well as an existing account with the bank or credit union to open a PLOC.
• Credit impact: Both can harm or help your credit score, depending on how you manage the loan. However, as a revolving credit line, a PLOC will add to your available credit and impact your credit utilization — which can account for up to 30% of your credit score. A high credit utilization can hurt your score, while a low one can improve it.
• Availability: Personal loans are widely available from sources including online lenders, banks, and credit unions. Personal lines of credit, on the other hand, are typically available through banks and credit unions only and require an existing account.

Impact on credit

How personal loans affect your credit score

Since a personal loan requires a hard credit inquiry, formally applying can cause a small, temporary dip in your credit score. The increase in outstanding debt may also negatively impact your credit score. But the effect may be temporary if you repay your personal loan responsibly.

How lines of credit affect your credit score

Like most personal loans, applying for a personal line of credit typically requires a hard credit check, which generally causes your credit score to dip. The impact on your credit going forward depends on how you use the credit line.

“A personal line of credit is a type of revolving credit, so your utilization ratio impacts your credit score,” says Epps. That means if you borrow a large portion of your credit limit at once, your credit score could decline. Your credit score may also drop if you fail to make the minimum payments. But opening a PLOC increases your total credit limit, so if you use very little of your available credit at any time, it could improve your credit score.

Examples of when either option is a better choice

Scenarios when personal loans make more sense

• Strict budgeting is important: If you need predictable monthly payments to stay on top of your finances, a personal loan might be the right fit.
• You know the cost upfront: If you know how much your car repair, HVAC replacement, veterinary bill, or other unexpected expense will cost, it's often easier to take out a personal loan. That's especially true if you're just making a one-time payment to your contractor or service provider.
• You're making a major purchase: If you're buying a new refrigerator, a laptop, or a used car, it makes sense to get a personal installment loan versus a line of credit. You'll benefit from a fixed interest rate, which may also be lower than the rate on a PLOC if you have very good credit.
• You're paying off credit card debt: Using personal loan funds to pay off your credit cards can save money on interest since personal loan rates are generally lower than credit card rates. The average interest rate on a two-year personal loan was 11.57% APR, according to the Federal Reserve, while the average interest rate on credit cards was 21.16% APR. But it can also make sense if you're struggling to afford minimum payments. By taking out a personal loan with a years-long repayment period, you could potentially secure lower monthly payments and improve your credit score in the process.

Scenarios when personal lines of credit make more sense

• Your income is irregular: Similar to a credit card, a PLOC can help you smooth out cash flow issues temporarily. However, a PLOC could have a much lower interest rate than a credit card, especially if you have good credit. Lines of credit can also act as overdraft protection if you apply for one where you bank.
• You're financing an ongoing project: A PLOC may be helpful for projects that require smaller payments over time, especially if you don't know the total cost ahead of time. For example, you might use it to pay different contractors for a home remodel, hire vendors for a wedding, or pay for medical treatment for a chronic condition.
• Your kids are in an expensive phase: A PLOC might help you budget for a temporarily expensive phase of your kids' development — for example, it could help ensure your daycare or college tuition payments arrive on time. Some PLOCs allow interest-only payments during the draw period, so you can make smaller payments the first several years.

Alternative funding options to consider

Home equity loan or HELOC

Home equity loans and home equity lines of credit (HELOCs) allow you to borrow against the equity in your home. Your home acts as collateral for the loan or line of credit, so there's a risk of foreclosure if you can't repay.

A home equity loan is similar to a personal loan in that it provides a lump sum and typically features a fixed repayment schedule, while a HELOC is a credit line you can draw from repeatedly. Home equity loans usually come with upfront costs and could take weeks to close, while HELOCs could have no or low closing costs.

Epps says these secured loans are “better for larger, planned expenses, such as renovations or debt consolidation” because they tend to feature lower interest rates. “Just know you're putting your house on the line if you can't repay,” he says.

Credit cards

If you can repay the expense within the grace period, a credit card is a great option. Some credit card issuers also offer 0% APR promotions for new cardholders. If you qualify, you could potentially avoid interest for up to 21 months. Be careful not to carry a balance past the promotional period, though, or you'll get stuck paying the card's regular APR.

Compare: Personal Loan vs. Credit Card: Which Is Better?

Cash-out refinance

A cash-out refinance involves paying off your existing mortgage with a new and larger home loan and keeping the remaining loan amount as cash. Like a regular mortgage, a cash-out refinance requires closing costs, but some programs allow you to roll upfront costs into the loan. A cash-out refinance requires you to have equity in your home. If your existing mortgage has a low rate, refinancing could raise your monthly payment significantly.